-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RLTw6P9hK+yGb4ljvbHwwyRtzpT0PYNwh6NLwHz+sINTI6xg8q+dMX7x/S3KKZjN quSFOg365z3TDpcTY7X47g== 0000318300-01-000014.txt : 20010313 0000318300-01-000014.hdr.sgml : 20010313 ACCESSION NUMBER: 0000318300-01-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES BANCORP INC CENTRAL INDEX KEY: 0000318300 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 310987416 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16772 FILM NUMBER: 1565849 BUSINESS ADDRESS: STREET 1: 138 PUTNAM ST STREET 2: P O BOX 738 CITY: MARIETTA STATE: OH ZIP: 45750 BUSINESS PHONE: 7403733155 10-K 1 0001.txt PEOPLES BANCORP INC. FORM 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 0-16772 PEOPLES BANCORP INC. ------------------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) Ohio --------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 31-0987416 ---------------------------------------------- (I.R.S. Employer Identification No.) 138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750 - -------------------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 373-3155 ---------------- Securities registered pursuant to Section 12(b) of the Act: None ------ Securities registered pursuant to Section 12(g) of the Act: Common Shares,No Par Value (6,499,825 outstanding at February 26, 2001 ----------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- ---------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based upon the closing price of the Common Shares of the Registrant on The NASDAQ National Market as of February 26, 2001, the aggregate market value of the Common Shares of the Registrant held by nonaffiliates on that date was $103,186,000. For this purpose, certain executive officers and directors are considered affiliates. Documents Incorporated by Reference: Portions of Registrant's definitive Proxy Statement relating to the Annual Meeting to be held April 12, 2001, are incorporated by reference into Part III of this Annual Report on Form 10-K. TABLE OF CONTENTS PART I Page Item 1. Business 3 Item 2. Properties 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 32 Item 8. Financial Statements and Supplementary Data 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 32 PART III Item 10. Directors and Executive Officers of the Registrant 55 Item 11. Executive Compensation 55 Item 12. Security Ownership of Certain Beneficial Owners and Management 56 Item 13. Certain Relationships and Related Transactions 56 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 57 Signatures 58 Exhibit Index 59 PART I ITEM 1. BUSINESS. - -------------------- INTRODUCTION Peoples Bancorp Inc. ("Peoples") was organized as a bank holding company in 1980. At December 31, 2000, Peoples' wholly-owned subsidiaries included Peoples Bank, National Association ("Peoples Bank") and Northwest Territory Life Insurance Company. Peoples Bank also owns an insurance agency subsidiary and an asset management subsidiary. Peoples operates 40 sales offices in the states of Ohio, West Virginia and Kentucky. At December 31, 2000, Peoples had total assets of $1.1 billion, total loans of $737.0 million, total deposits of $757.6 million, and total stockholders' equity of $83.2 million. At December 31, 2000, Peoples Bank held approximately $500 million of trust assets (market value). For the year ended December 31, 2000, Peoples' return on average assets was 1.02% and return on average stockholders' equity was 14.92%. Peoples provides an array of financial products and services to its customers through Peoples Bank, including checking accounts; NOW and Super NOW accounts; money market deposit accounts; savings accounts; time certificates of deposit; commercial, installment, and commercial and residential real estate mortgage loans; credit and debit cards; lease financing; corporate and personal trust services; and safe deposit rental facilities. Peoples also sells travelers checks, money orders and cashier's checks. Services are provided through ordinary walk-in offices, automated teller machines ("ATMs"), automobile drive-in facilities called "Motor Banks," banking by phone, and Internet-based banking. Peoples Insurance Agency, Inc. ("Peoples Insurance") offers a complete line of life and health and property and casualty products. In addition, a full line of investment products is offered through an unaffiliated registered broker dealer. At December 31, 2000, Peoples had 388 full-time equivalent employees (including 27.5 full-time equivalent employees at the parent company level). Peoples' principal executive office is located at 138 Putnam Street, Marietta, Ohio 45750, and its telephone number is (740) 373-3155. Peoples' common stock is traded through the NASDAQ National Market System under the symbol PEBO and its web site is www.peoplesbancorp.com. In the past five years, Peoples has experienced significant growth in assets and increased its capital position, primarily through acquisitions as well as purchases of full-service banking centers and associated assets and liabilities. For the five-year period ended December 31, 2000, Peoples' assets grew at a 13.0% compound annual growth rate, while stockholders' equity grew at a compound annual growth rate of 8.2%. Peoples has also had a history of consistent earnings growth, as earnings per share grew at a compound rate of 6.9% for the five-year period ended December 31, 2000. Over that same period, Peoples' annual return on average assets and stockholders' equity averaged 1.18% and 13.83%, respectively. Peoples routinely explores opportunities for additional growth and expansion of its core financial service businesses, including the acquisition of companies engaged in similar activities. Management also focuses on internal growth as a method for reaching performance goals and reviews key performance indicators on a regular basis to measure Peoples' success. There can be no assurance, however, that Peoples will be able to grow, or if it does, that any such growth or expansions will result in an increase in Peoples' earnings, dividends, book value or the market value of its common shares. Recent Acquisitions and Additions - --------------------------------- On January 26, 2000, Peoples Bank opened a full-service sales office within a newly constructed Wal-Mart superstore located at 2900 Pike Street, Parkersburg, West Virginia. This sales office is the third office to open within Wal-Mart supercenters and offers a wide variety of financial products and services including ATM access. On January 2, 2001, Peoples Bank opened a full-service office at 3411 Emerson Avenue in Parkersburg, West Virginia. The office offers an ATM access as well as an Internet Cafe, an "Investment Resource Center" complete with a large screen television, financial magazines and newspapers and a "Home Resource Center" that provides opportunities for clients to retrieve information from the Internet and other reference materials regarding buying or renting homes. These areas contain sales areas where associates can assist clients with all their financial needs. Effective at the close of business on February 23, 2001, Peoples acquired Lower Salem Commercial Bank for a total consideration of $2.4 million ($0.9 million in cash and $1.5 million in common stock). Lower Salem Commercial Bank has one full-service banking office located in Lower Salem, Ohio and at December 31, 2000, had total assets of $22.9 million, deposits of $18.1 million and shareholders' equity of $2.2 million. Peoples now operates the former Lower Salem Commercial Bank as a full-service sales office of Peoples Bank. CUSTOMERS AND MARKETS Peoples' service area has a diverse economic structure. Principal industries in the area include metals, plastics and petrochemical manufacturing; oil, gas and coal production; and related support industries. In addition, tourism, education and other service-related industries are important and growing industries. Consequently, Peoples is not dependent upon any one industry segment for its business opportunities. Peoples Bank originates various types of loans, including commercial and commercial real estate loans, residential real estate loans, home equity lines of credit, real estate construction loans, and consumer loans (including loans to individuals, credit card loans, and indirect loans). In general, Peoples Bank retains most of its originated loans and, therefore, secondary market activity has been minimal. Loans are spread over a broad range of industrial classifications. Management believes that it has no significant concentrations of loans to borrowers engaged in the same or similar industries and it has no loans to foreign entities. The lending market areas served are primarily concentrated in southeastern Ohio and neighboring areas of Kentucky and West Virginia. In addition, loan production offices in central Ohio provide opportunities to serve customers in that economic region. Legal Lending Limit - ------------------- At December 31, 2000, Peoples Bank had not extended credit to any one borrower in excess of its legal lending limit of approximately $15.3 million at the time the loan was closed. Commercial Loans - ---------------- At December 31, 2000, Peoples had approximately $310.6 million in commercial loans (including commercial, financial and agricultural loans) outstanding, representing approximately 42.1% of the total aggregate loan portfolio as of that date. LENDING PRACTICES. Commercial lending entails significant additional risks as compared with consumer lending (i.e., single-family residential mortgage lending, installment lending, credit card loans and indirect lending). In addition, the payment experience on commercial loans typically depends on adequate cash flow of a business and thus may be subject, to a greater extent, to adverse conditions in the general economy or in a specific industry. Loan terms include amortization schedules commensurate with the purpose of each loan, the source of repayment and the risk involved. Approval from the Board of Directors is required for loans to borrowers whose aggregate total debt, including the principal amount of the proposed loan, exceeds $3.0 million. The primary analysis technique used in determining whether to grant a commercial loan is the review of a schedule of cash flows to evaluate whether anticipated future cash flows will be adequate to service both interest and principal due. In addition, collateral is reviewed to determine its value in relation to the loan. Peoples periodically evaluates all new commercial loans greater in amount than $250,000 and on an annual basis, all loans greater in amount than $500,000. If deterioration has occurred, Peoples takes effective and prompt action designed to assure repayment of the loan. Upon detection of the reduced ability of a borrower to meet cash flow obligations, the loan is considered an impaired loan and reviewed for possible downgrading or placement on non-accrual status. Consumer Loans - -------------- At December 31, 2000, Peoples had outstanding consumer loans (including indirect loans and credit cards) in an aggregate amount of approximately $122.8 million or approximately 16.7% of the aggregate total loan portfolio. LENDING PRACTICES. Consumer loans generally involve more risk as to collectibility than mortgage loans because of the type and nature of the collateral and, in certain instances, the absence of collateral. As a result, consumer lending collections are dependent upon the borrower's continued financial stability, and thus are more likely to be adversely affected by employment loss, personal bankruptcy, or adverse economic conditions. Credit approval for consumer loans requires demonstration of sufficiency of income to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is the policy of Peoples to review its consumer loan portfolio monthly and to charge off loans that do not meet its standards and to adhere strictly to all laws and regulations governing consumer lending. A qualified compliance officer is responsible for monitoring performance in this area and for advising and updating loan personnel. Peoples Bank makes credit life insurance and health and accident insurance available to all qualified buyers, thus reducing risk of loss when a borrower's income is terminated or interrupted. Peoples Bank also offers its customers credit card access through its consumer lending department. Real Estate Loans - ----------------- At December 31, 2000, Peoples had approximately $303.6 million ($257.2 million, $26.1 million, and $20.3 million, respectively) of residential real estate loans, home equity lines of credit and construction mortgages outstanding, representing 41.2% of total loans outstanding. LENDING PRACTICES. Peoples requires that the residential real estate loan amount be no more than 90% of the purchase price or the appraisal value of the real estate securing the loan, unless private mortgage insurance is obtained by the borrower for the percentage exceeding 90%. On occasion, Peoples may lend up to 100% of the appraised value of the real estate. The risk conditions of these loans are considered during underwriting for the purposes of establishing an interest rate compatible with the risks inherent in mortgage lending and based on the equity of the home. Loans made in this lending category are generally one to five year adjustable rate, fully amortized mortgages. Peoples also generates fixed rate real estate loans and generally retains these loans. All real estate loans are secured by first mortgages with evidence of title in favor of Peoples in the form of an attorney's opinion of the title or a title insurance policy. Peoples also requires proof of hazard insurance with Peoples Bank named as the mortgagee and as the loss payee. Licensed appraisals are required in the case of loans in excess of $250,000. HOME EQUITY LOANS. Home equity lines of credit are generally made as second mortgages by Peoples Bank. The maximum amount of a home equity line of credit is generally limited to 80% of the appraised value of the property less the balance of the first mortgage. Peoples Bank will lend up to 100% of the appraised value of the property at higher interest rates that are considered compatible with the additional risk assumed in these types of equilines. The home equity lines of credit are written with ten-year terms, but are subject to review upon request for renewal. For the past two years, Peoples Bank has generally charged a fixed rate on home equity loans for the first five years. At the end of the five-year period, the equiline reverts to a variable interest rate product. CONSTRUCTION LOANS. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, Peoples Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. COMPETITION Peoples experiences significant competition in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks, savings associations, insurance companies, governmental agencies, credit unions, brokerage firms and pension funds. The primary factors in competing for loans are interest rate and overall lending services. Competition for deposits comes from other commercial banks, savings associations, money market funds and credit unions as well as from insurance companies and brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity, convenience of office location and overall financial condition. Peoples believes that its size provides flexibility, which enables the company to offer an array of banking products and services. Peoples' financial condition also contributes to a favorable competitive position in the markets it serves. Peoples primarily focuses on non-major metropolitan markets in which to provide products and services. Management believes Peoples has developed a niche and a certain level of expertise in serving these communities. Peoples historically has operated under a "needs-based" selling approach that management believes has proven successful in serving the financial needs of many customers. Management anticipates that in future periods, Peoples will continue to increase its investment in sales training and education to assist in the development of Peoples' associates and their identification of customer service opportunities. It is not Peoples' strategy to compete solely on the basis of interest rate. Management believes that a focus on customer relationships and incentives that promote customers continued use of Peoples' financial products and services will lead to enhanced revenue opportunities. Management believes the integration of traditional financial products with the recent entry into insurance product offerings will lead to enhanced revenues through complementary product offerings that satisfy customer demands for high quality, "one-stop shopping." SUPERVISION AND REGULATION The following is a summary of certain statutes and regulations affecting Peoples and its subsidiaries and is qualified in its entirety by reference to such statutes and regulations: General - ------- BANK HOLDING COMPANY. Peoples is a bank holding company under the Bank Holding Company Act of 1956, which restricts the activities of Peoples and the acquisition by Peoples of voting stock or assets of any bank, savings association or other company. Peoples is also subject to the reporting requirements of, and examination and regulation by, the Federal Reserve Board. Peoples' subsidiary bank, Peoples Bank, is subject to restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to Peoples or its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of Peoples and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to Peoples and other subsidiaries. Peoples is prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. Peoples and Peoples Bank are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by Peoples or its subsidiaries. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (better known as or "GLB", or the Financial Services Modernization Act of 1999) which, effective March 11, 2000, permitted bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. Also effective March 11, 2000, no regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. While qualified to become a Financial Holding Company, Peoples remains a bank holding company. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating. Peoples decision to reorganize its banking subsidiaries by merging them into a single national charter was made, in part, in an effort to better position the Company under GLB. See further discussion of the merger under "Future Outlook" on page 29. BANKING SUBSIDIARIES. Peoples Bank is a national banking association chartered under the National Bank Act and is regulated by the Office of the Comptroller of the Currency. Peoples Bank provides FDIC insurance on its deposits and is a member of the Federal Home Loan Bank of Cincinnati. Federal Deposit Insurance Corporation - ------------------------------------- The FDIC insures the deposits of Peoples Bank, which is subject to the applicable provisions of the Federal Deposit Insurance Act. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the bank's regulatory agency. Federal Home Loan Bank - ---------------------- The FHLBs provide credit to their members in the form of advances. As a member of the FHLB of Cincinnati, Peoples Bank must maintain an investment in the capital stock of that FHLB in an amount equal to the greater of 1% of the aggregate outstanding principal amount of its respective residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. Capital Requirements - -------------------- FEDERAL RESERVE BOARD. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines include both a definition of capital and a framework for calculating weighted-risk assets by assigning assets and off-balance sheet items to broad risk categories. For further discussion regarding Peoples' risk-based capital requirements, see Note 13 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. OFFICE OF THE COMPTROLLER OF CURRENCY. National bank subsidiaries, such as Peoples Bank, are subject to similar capital requirements adopted by the Comptroller of the Currency. Limits on Dividends - ------------------- Peoples' ability to obtain funds for the payment of dividends and for other cash requirements largely depends on the amount of dividends declared by Peoples Bank and Peoples' other subsidiaries. However, the Federal Reserve Board expects Peoples to serve as a source of strength to Peoples Bank. The Federal Reserve Board may require Peoples to retain capital for further investment in Peoples Bank, rather than pay dividends to its shareholders. Peoples Bank may not pay dividends to Peoples if, after paying those dividends, Peoples Bank would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. Peoples Bank must have the approval from the Office of the Comptroller of Currency if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year's net earnings and the retained earnings for the preceding two years, less required transfers to surplus. These provisions could limit Peoples' ability to pay dividends on its outstanding common shares. For further discussion regarding the payment of dividends by Peoples, see Note 13 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Federal and State Laws - ---------------------- Peoples Bank is subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of a bank to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent a bank lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas. MONETARY POLICY AND ECONOMIC CONDITIONS The business of financial institutions is affected not only by general economic conditions, but also by the policies of various governmental regulatory agencies, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings, and changes in the reserve requirements against depository institutions' deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, and the interest rates charged on loans, as well as the interest rates paid on deposits and accounts. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the money markets and the activities of monetary and fiscal authorities, Peoples can make no definitive predictions as to future changes in interest rates, credit availability or deposit levels. EFFECT OF ENVIRONMENTAL REGULATION Peoples' primary exposure to environmental risk is through its lending activities. In cases when management believes environmental risk potentially exists, Peoples mitigates its environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral. In regards to residential real estate lending, management reviews those loans with inherent environmental risk on an individual basis and makes decisions based on the dollar amount of the loan and the materiality of the specific credit. Peoples anticipates no material effect on capital expenditures, earnings or the competitive position of itself or any subsidiary as a result of compliance with federal, state or local environmental protection laws or regulations. STATISTICAL FINANCIAL INFORMATION REGARDING PEOPLES The following listing of statistical financial information provides comparative data for Peoples over the past three and five years, as appropriate. These tables should be read in conjunction with Item 7 of this Form 10-K ("Management's Discussion and Analysis of Financial Condition and Results of Operation") and the Consolidated Financial Statements of Peoples and its subsidiaries found at pages 33 through 54 of this Form 10-K. Average Balances and Analysis of Net Interest Income:
(Dollars in Thousands) 2000 1999 1998 Average Average Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Securities (1): Taxable $ 290,728 $ 20,031 6.89% $ 258,924 $ 16,600 6.41% $ 183,372 $ 11,671 6.36% Nontaxable (2) 34,927 2,641 7.56% 43,805 3,287 7.50% 34,653 2,677 7.72% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Total 325,655 22,672 6.96% 302,729 19,887 6.57% 218,025 14,348 6.58% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Loans (3) (4): Commercial 299,313 27,591 9.22% 247,141 21,515 8.71% 186,746 17,156 9.19% Real estate 274,668 22,828 8.31% 242,899 20,052 8.26% 234,141 20,176 8.62% Consumer 124,163 13,044 10.51% 113,635 11,766 10.35% 111,824 11,684 10.45% Valuation reserve (10,979) (10,121) (9,134) ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Total 687,165 63,463 9.09% 593,554 53,333 8.83% 523,577 49,016 9.20% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Short-term Investments: Interest-bearing 479 22 4.59% 3,390 143 4.22% 3,967 222 5.60% deposits Federal funds sold 142 8 5.63% 5,074 244 4.81% 20,671 1,104 5.34% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Total 621 30 4.83% 8,464 387 4.57% 24,638 1,326 5.38% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Total earning assets 1,013,441 86,165 8.50% 904,747 73,607 8.14% 766,240 64,690 8.45% Other assets 77,103 80,496 65,056 ============ =========== =========== Total assets $ 1,090,544 $ 985,243 $ 831,296 ============ =========== =========== Deposits: Savings $ 83,246 $ 1,964 2.36% $ 95,606 $ 2,290 2.40% $ 97,262 $ 2,764 2.84% Interest-bearing demand 234,311 10,193 4.35% 213,342 7,560 3.54% 168,035 6,002 3.57% Time 341,020 19,102 5.60% 321,460 16,106 5.01% 321,920 17,284 5.37% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Total 658,577 31,259 4.75% 630,408 25,956 4.12% 587,217 26,050 4.44% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Borrowed Funds: Short-term 99,324 6,162 6.20% 54,394 2,655 4.88% 44,959 2,241 4.98% Long-term 144,018 7,418 5.15% 114,388 5,647 4.94% 38,885 2,205 5.67% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Total 243,342 13,580 5.58% 168,782 8,302 4.92% 83,844 4,446 5.30% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Total interest-bearing liabilities 901,919 44,839 4.97% 799,190 34,258 4.29% 671,061 30,496 4.54% ------------- ---------- -------- ----------- ---------- -------- ----------- ---------- -------- Non-interest bearing demand deposits 81,205 78,799 70,064 Other liabilities 32,829 26,474 7,904 ------------- ----------- ----------- Total liabilities 1,015,953 904,463 749,029 Stockholders' 74,591 80,780 82,267 equity ============= =========== =========== Total liabilities and stockholders' $ 1,090,544 $ 985,243 $ 831,296 equity ============= =========== =========== Interest rate spread $ 41,326 3.53% $ 39,349 3.85% $ 34,194 3.91% ---------- -------- ---------- -------- ----------- -------- Interest income/earning assets 8.50% 8.14% 8.45% Interest expense/earning assets 4.42% 3.79% 3.98% ======== ======== ======== Net yield on earning assets (net interest 4.08% 4.35% 4.47% margin) ======== ======== ======== (1) Average balances of investment securities based on carrying value. (2) Computed on a fully tax equivalent basis using a tax rate of 35%. Interest income was increased by $1,036, $1,261 and $1,046 for 2000, 1999 and 1998, respectively. (3) Nonaccrual and impaired loans are included in the average balances listed. Related interest income on nonaccrual loans prior to the loan being put on nonaccrual is included in loan interest income. (4) Loan fees included in interest income for 2000, 1999 and 1998 were $708, $650 and $551, respectively.
Rate Volume Analysis:
(Dollars in Thousands) Change from 1999 to 2000 (1) Change from 1998 to 1999 (1) Increase (decrease) in: Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------------ Investment income: (2) Taxable $ 2,134 $ 1,297 $ 3,431 $ 4,843 $ 86 $ 4,929 Nontaxable (671) 25 (646) 689 (79) 610 - ------------------------------------------------------------------------------------------------------------------------ Total 1,463 1,322 2,785 5,532 7 5,539 - ------------------------------------------------------------------------------------------------------------------------ Loan Income Commercial 4,751 1,325 6,076 5,298 (939) 4,359 Real estate 2,640 136 2,776 739 (863) (124) Consumer 1,104 174 1,278 212 (130) 82 - ------------------------------------------------------------------------------------------------------------------------ Total 8,495 1,635 10,130 6,249 (1,932) 4,317 - ------------------------------------------------------------------------------------------------------------------------ Short-term investments (408) 51 (357) (789) (150) (939) - ------------------------------------------------------------------------------------------------------------------------ Total interest income 9,550 3,008 12,558 10,992 (2,075) 8,917 ======================================================================================================================== Interest expense: Savings (292) (34) (326) (47) (427) (474) Interest-bearing 794 1,839 2,633 1,606 (48) 1,558 demand deposits Time 1,019 1,977 2,996 (25) (1,153) (1,178) Short-term borrowings 2,641 866 3,507 461 (48) 413 Long-term borrowings 1,517 254 1,771 3,762 (320) 3,442 - ------------------------------------------------------------------------------------------------------------------------ Total interest expense 5,679 4,902 10,581 5,757 (1,996) 3,761 ======================================================================================================================== $ 3,871 $ (1,894) $ 1,977 $ 5,235 $ (79) $ 5,156 ======================================================================================================================== (1)The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the dollar amounts of the change in each. (2) Presented on a fully tax equivalent basis.
Loan Maturities at December 31, 2000: Due in (Dollars in Thousands) One Year Due Due in Through After One Year Five Five Loan Type Or Less Years Years Total Commercial loans: Fixed $ 31,705 $ 38,629 $ 15,639 $ 85,973 Variable 74,822 46,314 103,449 224,585 - ------------------------------------------------------------------------------- 106,527 84,943 119,088 310,558 =============================================================================== Real estate loans: Fixed 12,552 45,886 60,460 118,898 Variable 54,784 67,761 62,147 184,692 - ------------------------------------------------------------------------------- 67,336 113,647 122,607 303,590 =============================================================================== Consumer loans: Fixed 46,795 65,042 1,710 113,547 Variable 8,065 849 356 9,270 - ------------------------------------------------------------------------------- 54,860 65,891 2,066 122,817 =============================================================================== Total $ 228,723 $ 264,481 $ 243,761 $ 736,965 =============================================================================== Loan Portfolio Analysis: (Dollars in Thousands)
Year-end balances: 2000 1999 1998 1997 1996 Commercial, financial and agricultural $ 310,558 $ 272,219 $ 212,530 $ 159,035 $ 127,927 Real estate 283,323 252,427 233,550 228,689 175,505 Real estate, construction 20,267 14,067 10,307 19,513 9,944 Consumer 115,913 114,412 104,718 107,158 102,044 Credit card 6,904 6,708 6,812 7,175 6,993 - ----------------------------------------------------------------------------------------------------------------- Total $ 736,965 $ 659,833 $ 567,917 $ 521,570 $ 422,413 - ----------------------------------------------------------------------------------------------------------------- Average total loans 698,144 603,922 532,711 468,229 400,264 Average allowance for loan losses (10,979) (10,121) (9,134) (7,521) (6,799) - ----------------------------------------------------------------------------------------------------------------- Average loans, net of allowance $ 687,165 $ 593,801 $ 523,577 $ 460,708 $ 393,465 - ----------------------------------------------------------------------------------------------------------------- Allowance for loan losses, January 1 $ 10,264 $ 9,509 $ 8,356 $ 6,873 $ 6,726 Allowance for loan losses acquired -- -- -- 290 -- Loans charged off: Commercial, financial and agricultural 780 306 101 354 342 Real estate 74 77 46 42 93 Consumer 1,018 932 1,220 1,258 1,726 Credit card 189 203 278 263 168 - ----------------------------------------------------------------------------------------------------------------- Total 2,061 1,518 1,645 1,917 2,329 - ----------------------------------------------------------------------------------------------------------------- Recoveries: Commercial, financial and agricultural 78 44 55 124 36 Real estate 2 23 13 6 75 Consumer 303 304 378 374 391 Credit card 22 24 27 17 9 - ----------------------------------------------------------------------------------------------------------------- Total 405 395 473 521 511 - ----------------------------------------------------------------------------------------------------------------- Net chargeoffs: Commercial, financial and agricultural 702 262 46 230 306 Real estate 72 54 33 36 18 Consumer 715 628 842 884 1,335 Credit card 167 179 251 246 159 - ----------------------------------------------------------------------------------------------------------------- Total 1,656 1,123 1,172 1,396 1,818 - ----------------------------------------------------------------------------------------------------------------- Provision for loan losses, December 31 2,322 1,878 2,325 2,589 1,965 - ----------------------------------------------------------------------------------------------------------------- Allowance for loan losses, December 31 $ 10,930 $ 10,264 $ 9,509 $ 8,356 $ 6,873 ================================================================================================================= Allocation of allowance for loan losses at December 31: Commercial $ 5,992 $ 5,164 $ 3,757 $ 3,147 $ 2,741 Real estate 1,112 1,557 1,453 1,478 1,050 Consumer 2,701 2,161 2,556 2,255 2,078 Credit card 432 434 628 395 131 Unallocated 693 948 1,115 1,081 873 - ----------------------------------------------------------------------------------------------------------------- Total $ 10,930 $ 10,264 $ 9,509 $ 8,356 $ 6,873 ================================================================================================================= Percent of loans to total loans at December 31: Commercial 42.1% 41.3% 37.4% 30.5% 30.3% Real estate 38.4 38.3 41.1 43.8 41.5 Real estate, construction 2.8 2.1 1.9 3.8 2.3 Consumer 15.8 17.3 18.4 20.5 24.2 Credit card 0.9 1.0 1.2 1.4 1.7 - ----------------------------------------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% =================================================================================================================
(Dollars in Thousands) 2000 1999 1998 1997 1996 Ratio of net chargeoffs to average total loans: Commercial 0.10% 0.04% 0.01% 0.05% 0.08% Real estate 0.01 0.01 0.01 0.01 0.00 Consumer 0.10 0.11 0.16 0.19 0.33 Credit card 0.02 0.03 0.04 0.05 0.04 - --------------------------------------------------------------------------------------------------- Total 0.23% 0.19% 0.22% 0.30% 0.45% - --------------------------------------------------------------------------------------------------- Nonperforming assets: Loans 90+ days past due 344 249 495 462 621 Renegotiated loans 518 747 392 -- -- Nonaccrual loans 4,280 1,109 687 1,220 999 - --------------------------------------------------------------------------------------------------- Total nonperforming loans 5,142 2,105 1,574 1,682 1,620 Other real estate owned 86 207 396 19 28 - --------------------------------------------------------------------------------------------------- Total nonperforming assets 5,228 2,312 1,970 1,701 1,648 - --------------------------------------------------------------------------------------------------- Nonperforming loans as a percent of total loans 0.70% 0.32% 0.28% 0.32% 0.38% - --------------------------------------------------------------------------------------------------- Nonperforming assets as a percent of total assets 0.46% 0.21% 0.22% 0.22% 0.27% - ---------------------------------------------------------------------------------------------------
Nonperforming loans are comprised of loans 90 days or more past due, renegotiated loans and nonaccrual loans. Nonperforming assets are comprised of nonperforming loans and other real estate owned. Interest income on nonaccrual and renegotiated loans that would have been recorded under the original terms of the loans for 2000, 1999 and 1998 was $204 (of which $32 was actually recorded), $102 (of which $66 was actually recorded) and $59 (of which $30 was actually recorded), respectively. Maturities of Certificates of Deposit $100,000 or More: (Dollars in Thousands) 2000 1999 1998 1997 Under 3 months $ 17,430 $ 12,261 $ 19,121 $ 13,302 3 to 6 months 6,871 8,275 14,335 24,069 6 to 12 months 16,639 23,174 9,189 9,520 Over 12 months 24,209 11,872 9,262 10,698 - ------------------------------------------------------------------------------ Total $ 65,149 $ 55,582 $ 51,907 $ 57,589 - ------------------------------------------------------------------------------ ITEM 2. PROPERTIES - ------------------- Peoples' sole banking subsidiary, Peoples Bank, generally owns its offices, related facilities and unimproved real property. Peoples Bank operates offices in Marietta (4 offices), Belpre (2 offices), Lowell, Lower Salem, Reno, Nelsonville (2 offices), Athens (3 offices), The Plains, Middleport, Rutland, Pomeroy (2 offices), Gallipolis, Caldwell, Chesterhill, McConnelsville, Baltimore, Lancaster and Granville, Ohio. In West Virginia, Peoples operates offices in Huntington, Parkersburg (3 offices), Vienna, Point Pleasant (2 offices), New Martinsville (2 offices) and Steelton. Office locations in Kentucky include Catlettsburg, Grayson, Ashland and Russell. Peoples Bank operates through 40 banking offices of which 11 are leased and the rest are owned. Rent expense on the leased properties totaled $210,000 in 2000. The following is a list of those properties that have leases expiring on or before June 2002: Location Address Lease Expiration Date - -------------------------------------------------------------------------------- The Plains Office 70 North Plains Road, Suite 101 June 2001 The Plains OH 45750 Lancaster Lending Office 117 West Main Street October 2001 Lancaster OH 43130 Athens Mall Office 801 East State Street June 2002 Athens OH 45701 Additional information concerning the property and equipment owned or leased by Peoples and its subsidiaries is incorporated herein by reference from Note 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. ITEM 3. LEGAL PROCEEDINGS. - --------------------------- There are no pending legal proceedings to which Peoples or any of its subsidiaries is a party or to which any of their property is subject other than ordinary routine litigation to which Peoples' subsidiaries are parties incidental to their respective businesses. Peoples considers none of such proceedings to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------- Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------------------------------------------------------------------------ The table presented below sets forth the high and low bids for the indicated periods, and the cash dividends declared, with respect to Peoples' common shares. Quarterly Market and Dividend Information PER SHARE High Bid Low Bid Dividend 2000 Fourth Quarter $ 15.25 $ 12.00 $ 0.14 Third Quarter 15.25 13.00 0.14 Second Quarter 18.00 13.00 0.14 First Quarter $ 19.77 $ 15.75 $ 0.14 - --------------------------------------------------------------------------- 1999 Fourth Quarter $ 24.89 $ 17.95 $ 0.13 Third Quarter 27.27 24.32 0.13 Second Quarter 25.45 18.28 0.13 First Quarter $ 21.28 $ 18.28 $ 0.12 - --------------------------------------------------------------------------- 1998 Fourth Quarter $ 22.52 $ 17.77 $ 0.12 Third Quarter 25.52 20.25 0.11 Second Quarter 29.07 24.38 0.11 First Quarter $ 24.65 $ 21.63 $ 0.11 - --------------------------------------------------------------------------- Peoples' common shares are traded on The NASDAQ National Market under the symbol PEBO. Bid information has been obtained directly from The NASDAQ National Market. Peoples plans to continue to pay quarterly cash dividends, subject to certain regulatory restrictions described in Note 13 to the Consolidated Financial Statements included in Item 8. The bid information and per share dividends have been retroactively adjusted for a 10% stock dividend issued on March 14, 2000, a 10% stock dividend issued on June 15, 1999, and a 3-for-2 stock split effective April 30, 1998. Peoples had 1,198 stockholders of record at December 31, 2000. ITEM 6. SELECTED FINANCIAL DATA. - --------------------------------- The information below has been derived from Peoples' Consolidated Financial Statements. (Dollars in Thousands, except Ratios and Per Share Data)
2000 1999 1998 1997 1996 Operating Data For the year ended: Total interest income ................... $ 85,129 $ 72,346 $ 63,645 $ 53,836 $ 47,397 Total interest expense .................. 44,839 34,258 30,497 25,216 21,966 Net interest income ..................... 40,290 38,088 33,148 28,620 25,431 Provision for loan losses ............... 2,322 1,878 2,325 2,589 1,965 Gains (losses) on securities transactions 10 (104) 418 (28) 48 Other income ............................ 8,918 7,633 6,820 5,966 5,130 Intangible amortization expense ......... 2,284 2,639 2,093 1,138 625 Other expense ........................... 28,778 25,558 21,183 18,127 16,897 Net income .............................. $ 11,126 $ 10,718 $ 10,045 $ 8,605 $ 7,651 - ----------------------------------------------------------------------------------------------------------------- Balance Sheet Data At year end: Total assets ............................ $ 1,135,834 $ 1,075,450 $ 880,284 $ 758,158 $ 616,635 Total intangibles ....................... 17,848 20,154 22,117 12,796 6,433 Investment securities ................... 330,521 328,306 235,569 174,291 147,783 Net loans ............................... 726,035 649,569 558,408 513,214 415,540 Total deposits .......................... 757,621 728,207 714,168 611,107 504,692 Long-term borrowings .................... 138,511 150,338 40,664 28,577 29,200 Stockholders' equity .................... 83,194 72,874 86,014 78,818 56,193 Tangible assets (1) ..................... 1,117,986 1,055,296 858,167 745,362 610,202 Tangible equity (2) ..................... $ 65,346 $ 52,720 $ 63,897 $ 66,022 $ 49,760 - ----------------------------------------------------------------------------------------------------------------- Significant Ratios Cash earnings to: (3) Average tangible assets (4) ........ 1.19% 1.30% 1.41% 1.42% 1.37% Average tangible equity (4) ........ 22.90 20.96 17.82 18.00 16.58 Net income to: Average total assets ............... 1.02 1.09 1.20 1.29 1.29 Average stockholders' equity ....... 14.92 13.27 12.21 14.33 14.43 Average stockholders' equity to average total assets ............ 6.8 8.2 9.9 9.0 8.9 Average loans to average deposits ....... 94.4 85.1 80.9 85.5 84.0 Risk-based capital ratio ................ 14.21 14.30 11.95 14.34 12.86 Dividend payout ratio ................... 33.1% 31.8% 30.4% 30.5% 30.5% - ----------------------------------------------------------------------------------------------------------------- Per Share Data Cash earnings: (3) Basic .............................. $ 1.95 $ 1.83 $ 1.65 $ 1.48 $ 1.29 Diluted ............................ 1.93 1.79 1.60 1.44 1.28 Net income: Basic .............................. 1.71 1.57 1.44 1.37 1.23 Diluted ............................ 1.69 1.53 1.40 1.32 1.21 Cash dividends paid ..................... 0.56 0.50 0.44 0.41 0.36 Book value at end of period ............. $ 12.81 $ 11.06 $ 12.39 $ 11.33 $ 8.99 Weighted average shares outstanding: Basic .............................. 6,523,808 6,846,071 6,975,989 6,303,782 6,239,589 Diluted ............................ 6,600,160 7,023,921 7,186,616 6,502,386 6,324,294 - ----------------------------------------------------------------------------------------------------------------- (1) Total assets less goodwill and core deposit intangibles. (2) Total stockholders' equity less goodwill and core deposit intangibles. (3) Excludes after-tax amortization of goodwill and core deposit intangibles. (4) Defined as cash earnings as a percentage of average total assets or average stockholders' equity minus average goodwill and core deposit intangibles.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. - -------------------------------------------------------------------------------- INTRODUCTION The following discussion and analysis of the Consolidated Financial Statements of Peoples is presented to provide insight into management's assessment of the financial results. Peoples' subsidiaries are Peoples Bank, National Association ("Peoples Bank") and Northwest Territory Life Insurance Company, an Arizona corporation that reinsures credit life and disability insurance issued to customers of Peoples' banking subsidiary. Peoples Bank also operates Peoples Insurance Agency, Inc. ("Peoples Insurance"), which offers a full range of life, property, and casualty insurance products to customers in Peoples' markets, and Peoples Loan Services, Inc. ("PLS"), which manages a portion of Peoples' loan portfolio. Peoples Bank is a member of the Federal Reserve System and subject to regulation, supervision, and examination by the Office of the Comptroller of the Currency ("OCC"). Peoples Bank offers complete financial products and services through 40 financial service locations and 27 ATMs in the states of Ohio, West Virginia, and Kentucky. Peoples Bank's e-banking service is Peoples OnLine Connection, and can be found on the Internet at www.peoplesbancorp.com. Peoples Bank provides an array of financial products and services to customers that include traditional banking products such as deposit accounts, lending products, credit and debit cards, corporate and personal trust services, and safe deposit rental facilities. Peoples Insurance also offers investment and insurance products. Peoples provides services through ordinary walk-in offices and automobile drive-in facilities, automated teller machines, banking by phone, and the Internet. Peoples Bank also makes available other financial services through Peoples Investments, which provides customer-tailored solutions for fiduciary needs, investment alternatives, and asset management needs (securities are offered exclusively through Raymond James Financial Services, member NASD/SIPC and an independent broker/dealer, located at Peoples Bank). This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and footnotes and the ratios and statistics contained elsewhere in the Form 10-K. References will be found in this Form 10-K to the following transactions that have impacted or will impact Peoples' results of operations: On April 20, 1999, Peoples sold, through PEBO Capital Trust I (a newly formed subsidiary) $30.0 million of 8.62% Capital Securities ("Capital Securities" or "Trust Preferred Securities"). The proceeds were used by the PEBO Capital Trust I to purchase, from Peoples, Junior Subordinated Deferrable Interest Debentures due May 1, 2029. In late April 1999, Peoples invested $10.0 million in Peoples Bank. The remaining proceeds were used for general corporate purposes, including the repurchase of a portion of Peoples' outstanding common shares. On December 10, 1999, Peoples announced approval to repurchase 165,000 shares (or approximately 2.5% of Peoples' outstanding common shares) from time to time in open market or privately negotiated transactions ("2000 Stock Repurchase Program"). During 2000, Peoples repurchased approximately 101,000 common shares authorized under the 2000 Stock Repurchase Program that expired on December 31, 2000. On January 12, 2001, Peoples announced approval to repurchase 125,000 shares (or approximately 2% of Peoples' outstanding common shares) from time to time in open market or privately negotiated transactions ("2001 Stock Repurchase Program"). The 2001 Stock Repurchase Program will expire on December 31, 2001. The combination of the issuance of Capital Securities in 1999 and the Stock Repurchase Programs has impacted and will continue to impact several key performance indicators of Peoples' future financial results. The impact, where significant, is discussed in the applicable sections of this Management's Discussion and Analysis. OVERVIEW OF THE INCOME STATEMENT Peoples had net income of $11,126,000 in 2000, an increase of $408,000 (or 3.8%) from $10,718,000 in 1999. On a diluted basis, earnings per share reached $1.69 in 2000, up $0.16 (or 10.5%) compared to the previous year. Peoples' core earnings increased due to net interest income growth and non-interest revenue enhancements. Return on average equity in 2000 totaled 14.92% compared to 13.27% in 1999. Return on average assets was 1.02% in 2000 compared to 1.09% the previous year. Diluted cash earnings per share for the year ended December 31, 2000, was $1.93, up $0.14 (or 7.8%) from $1.79 in diluted cash earnings per share in 1999. Cash earnings removes the after-tax impact of intangible amortization expense. Return on tangible assets decreased to 1.19% in 2000 compared to 1.30% in 1999. Return on tangible assets is defined as cash earnings as a percentage of average total assets minus goodwill and core deposit intangibles. Return on tangible equity improved to 22.90% in 2000 compared to 20.96% last year. Return on tangible equity is defined as cash earnings as a percentage of average total stockholders' equity minus goodwill and core deposit intangibles. Due to earning asset growth, net interest income in 2000 increased $2,202,000 (or 5.8%) to $40,290,000. The provision for loan losses in 2000 totaled $2,322,000, an increase of $444,000 compared to 1999 as a result of increased loan volume, less favorable loss experience, and general economic slowdowns in Peoples' markets. Bolstered by growth in deposit account service charges and insurance and investment commissions, non-interest income, excluding securities and asset disposal gains, increased $1,427,000 (or 18.8%) to $9,027,000. In 2000, Peoples reported net gains on securities transactions of $10,000 compared to net losses of $104,000 in 1999. In 2000, non-interest expense increased $2,865,000 (or 10.2%) to $31,062,000 in part as a result of investments designed to make financial services more convenient, flexible, and speedy for clients. Peoples has grown through acquisitions accounted for as purchase transactions which results in the amortization expense related to intangibles and affects earnings per share as well as other performance ratios. Because of the impact of purchase accounting and the related intangible amortization expense on Peoples' results of operation, management also uses "cash earnings," which removes the after-tax impact of intangible amortization expense, to evaluate the impact of acquisitions on profitability and Peoples' return on its investment. The discussion of cash earnings is also included in financial reporting to facilitate the comparison of Peoples' results of operations to competitors making acquisitions using pooling of interests accounting. Return on tangible assets and return on tangible equity removes the after-tax impact of intangible amortization expense and the balance sheet impact of average intangibles. In 2000, intangible amortization expense totaled $2,284,000 ($1,601,000 after taxes) compared to $2,639,000 ($1,833,000 after taxes) last year. Due to amortization, average balance sheet intangibles decreased to $19.0 million in 2000 compared to $20.9 million in 1999. INTEREST INCOME AND EXPENSE Net interest income, the amount by which interest income on earning assets exceeds interest paid on interest-bearing liabilities, remains Peoples' primary source of revenue. Interest-earning assets include loans and investment securities while interest-bearing liabilities include interest-bearing deposits and borrowed funds. Changes in market interest rates, as well as adjustments in the mix of interest-earning assets and interest-bearing liabilities, impacted net interest income in 2000. Increased net interest income in 2000 resulted from balance sheet growth, due to strong internal loan growth, and was the driving force behind Peoples' record profits. Net interest income grew to $40,290,000 in 2000, compared to $38,088,000 in 1999, an increase of $2,202,000 (or 5.8%). Total interest income reached $85,129,000 while interest expense totaled $44,839,000. In 1999, Peoples initiated an asset growth strategy to offset the costs to service the Trust Preferred Securities, thereby leveraging Peoples' increased regulatory capital levels ("Leverage Strategy"). The Leverage Strategy increased Peoples' earnings asset base approximately $150 million and was funded primarily by FHLB borrowings and other wholesale funding sources. The Leverage Strategy was implemented throughout the second quarter of 1999 and was completed on June 30, 1999. While total asset levels were maintained and even grown in 2000, most of the principal runoff from the investment portfolio was used to fund loan growth. Average total earning assets reached $1.01 billion in 2000, a $109 million (or 12.0%) increase over 1999. Average loans, the largest earning asset component on Peoples' balance sheet, grew $94.5 million (or 15.6%) in 2000. Due to the impact of Peoples' Leverage Strategy, Peoples' average balances of investment securities increased $23.0 million from $302.7 million in 1999 to $325.7 million in 2000. Included in interest income is $1,924,000 of tax-exempt income from investments issued by and loans made to states and political subdivisions. Since these revenues are not taxed, it is more meaningful to analyze net interest income on a fully tax equivalent ("FTE") basis. The FTE yield on earning assets was 8.50% in 2000, compared to 8.14% in 1999 while the cost of interest-bearing liabilities increased 68 basis points to 4.97%. Net interest margin is calculated by dividing FTE net interest income by average interest-earning assets and serves as a measurement of the net revenue stream generated by the mix and pricing of assets and liabilities from Peoples' balance sheet. In 2000, net interest margin was 4.08% compared to 4.35% in 1999. Net interest margin decreased in 2000 due to interest rate compression between loan pricing and funding source costs, primarily as a result of rising interest rates on short-term funding sources. Peoples' reliance on short-term funding has increased due to recent loan growth. Peoples' management anticipates that net interest margin could continue to be pressured in early 2001, although recent interest rate reductions by the Federal Reserve are expected to result in improved net interest margin later in 2001. The increase in Peoples' earning asset yield, which rose to 9.09% in 2000 compared to 8.83% in 1999, is primarily attributable to the increase in Peoples' loan portfolio yield and the mix of loans as a percent of earning assets. Peoples also saw improvement in its investment portfolio yield, which increased 39 basis points to 6.96% in 2000. The largest dollar volume of interest-bearing liabilities is deposits where interest costs increased 63 basis points to 4.75% in 2000. The most significant component of interest expense in 2000 was interest paid on time deposits (Certificates of Deposits and Individual Retirement Accounts). In 2000, Peoples paid interest of $19,102,000, or 5.60%, on average time deposit balances of $341.0 million. In 1999, the average rate paid on time deposits was 5.01% on balances of $321.5 million. The increased deposit costs in 2000 resulted from the upward repricing of the high dollar volume of Peoples' interest-bearing customer funding sources such as certificates of deposit and money market accounts. Management expects deposit pricing to be increasingly competitive and continues to focus its efforts toward increasing balances in non-interest bearing demand deposits, which grew, on average, $2.4 million to $81.2 million in average balances, and other lower cost deposit products. In addition to core deposit growth, Peoples continued to use a combination of short-term and long-term borrowings as funding sources to fuel loan growth in 2000. The cost of borrowed funds increased 66 basis points to 5.58% in 2000. Costs of borrowed funds have increased due to recent rises in market interest rates as well as repricing of certain FHLB borrowings Peoples' cash management services, offered to a variety of business customers, have provided short-term funding in the form of rate sensitive overnight repurchase agreements. In 2000, Peoples' average balances of these overnight repurchase agreements (excluding balances of national market repurchase agreements available through wholesale funding sources) increased $1.0 million to $31.2 million. The average rate paid in 2000 on overnight repurchase agreements totaled 5.39%, up 110 basis points from the prior year's average rate of 4.29%. Average total overnight repurchase agreements comprised a significant portion of Peoples' short-term borrowings. In late 1999 and continuing in 2000, Peoples accessed national market repurchase agreements in an effort to diversify Peoples' short-term funding sources as well as take advantage of marginally attractive short-term financing rates. National market repurchase agreements averaged $27.5 million in 2000 at an average rate of 6.37% compared to $18.6 million and an average rate of 5.69% in 1999. Peoples also continued to use short-term FHLB advances to fund its earning assets in 2000. Average short-term FHLB balances increased from $5.5 million in 1999 to $40.5 in 2000. Interest costs on these short-term borrowings grew to $2,696,000, at an average rate of 6.55%, compared to $296,000, at an average rate of 5.40%, in 1999. Management will continue to use short-term FHLB borrowings as a funding source for earning assets when appropriate. Long-term borrowing costs, which represent the largest average volume of borrowed fund costs, also increased compared to 1999. The rate paid on average long-term borrowings totaled 5.15% in 2000, up 21 basis points compared to 4.94% in 1999. The majority of Peoples' long-term borrowings are fixed rate FHLB borrowings with a call feature. Management plans to maintain access to long-term FHLB borrowings, with appropriate repricing characteristics, as a funding source. PROVISION FOR LOAN LOSSES In 2000, Peoples recorded a provision for loan losses of $2,322,000, compared to 1999's expense of $1,878,000. The provision is based upon management's continuing evaluation of the adequacy of the allowance for loan losses and is reflective of the volume concentrations, quality of the portfolio, and overall management assessment of the inherent credit risk. As a result of continuing anticipated loan growth, trends in losses and delinquencies, and recent slowdowns affecting the economy, management anticipates that loan loss provision will increase in the first quarter of 2001 compared to recent quarterly expense of $600,000. Loan loss provision after the first quarter of 2001 will be dependent on loan delinquencies, portfolio risk, overall loan growth, general economic conditions in Peoples' markets and other factors management considers in evaluating the adequacy of the allowance. Further information can be found later in this discussion under "Allowance for Loan Losses." NON-INTEREST INCOME Peoples' non-interest income is generated from four primary sources: service charges on deposit accounts, income derived from fiduciary activities, insurance and investment commissions, and electronic banking revenues. During 2000, Peoples' CONNECTIONS sales process, aimed at enhancing client service through integrated, relationship-based selling initiatives, continued as the focal point of the consolidated marketing activity to targeted customers and prospects. This focus has led to loan and deposit growth, as well as increases in non-interest income. Non-interest income from operations (excluding securities and asset disposal transactions) reached new levels in 2000, totaling $9,027,000, an increase of $1,427,000 (or 18.8%) compared to 1999. Peoples' service charge income on deposit accounts is based on the recovery of costs associated with services provided. Fee income generated from deposit accounts totaled $3,243,000 in 2000, an increase of $513,000 (or 18.8%) compared to $2,730,000 in 1999. Most of the increases are attributable to increases in the volume of overdrafts and non-sufficient fund fees, as well as growth in income generated from deposit services for business customers. Income from fiduciary activities, which is based primarily on the market value of assets being managed, totaled $2,608,000 in 2000, down $26,000 (or 1.0%) from 1999's total of $2,634,000. At December 31, 2000, Peoples Bank's Investment and Trust Division managed assets with a market value of approximately $500 million down from $560 million at year-end 1999 due primarily to the U.S. stock market correction in 2000. Peoples continues to focus on strengthening its position in its core markets in order to increase the number of clients served. Management believes fiduciary revenues will continue to be significant contributors to Peoples' non-interest income in the future. In addition to traditional sources of non-interest income, Peoples also offers a complete line of insurance and investment products through Peoples Insurance and Peoples Investments. Management believes these services are integral to Peoples' relationship and needs-based sales philosophy. Commissions on insurance and securities sales generated revenues of $1,283,000 in 2000, a $787,000 (or 159%) increase over the previous year. Peoples' life insurance and annuity sales accounted for a majority of the revenue growth with property and casualty insurance commission revenues also increasing during the last half of 2000 as Peoples Insurance client service teams continue to expand the number of clients served. Peoples offers credit life and disability insurance, as well as life and property insurance to consumers in Ohio and West Virginia. Insurance products are underwritten by various insurance companies and are made available through licensed insurance agency affiliates of Peoples. Peoples Investments offers clients asset management services, corporate bonds, municipal bonds, portfolio evaluation, asset allocation, tax shelters, unit trusts, common/preferred stocks, government securities, mutual funds, retirement planning, estate planning, tax-exempt securities, annuities, and financial planning services. Securities are offered exclusively through Raymond James Financial Services, member NASD/SIPC and an independent broker/dealer, located at many of Peoples' sales offices. Electronic banking, which includes ATM and debit card services, direct deposit services, and Internet banking, is one of the many delivery channels offered by Peoples to provide products and services to customers. In 2000, electronic banking revenues totaled $1,220,000, an increase of $187,000 (or 18.1%) compared to the same period last year. The increased revenues are due primarily to growth in the number of debit card users as well as corresponding volume increases in debit card usage. Management will continue to focus on electronic banking as a source of revenue as the financial services industry develops additional e-commerce capabilities. Management believes the recent growth in non-interest income reflects the success of Peoples' associates in professionally and quickly serving client needs. Management expects non-interest income will increase modestly in 2001 due to sustained insurance and investment revenue growth. Other traditional and non-traditional financial service products and delivery channels are evaluated regularly for potential inclusion in Peoples' product mix as management continues to explore new methods of enhancing non-interest income. GAIN (LOSS) ON SECURITIES TRANSACTIONS Peoples recorded net gains on securities transactions of $10,000 in 2000 compared to net losses of $104,000 the previous year. The net gains in 2000 were the result of normal portfolio management while the net losses in 1999 were due to Peoples repositioning its investment portfolio to improve pledging capabilities. (LOSS) GAIN ON ASSET DISPOSALS In 2000, losses on asset disposals, net of disposal gains, totaled $109,000 compared to net gains of $9,000 last year. In mid-2000, Peoples invested in a larger central processing unit, causing the increased net losses on asset disposals. Management believes the investment will enhance Peoples' processing capabilities, better support the integrated sales processes, and improve client service though speedier delivery of information, products, and services. NON-INTEREST EXPENSE Non-interest expense totaled $31,062,000 in 2000, up $2,865,000 (or 10.2%) compared to 1999. Peoples implemented several strategic initiatives that increased current operating expenses. In early 2000, Peoples merged its three banking subsidiaries into a single national charter, which has enhanced abilities to meet financial needs of clients. While the internal merger caused increased expense in the near term, particularly professional fees and regulatory costs, management believes the merger will result in greater efficiencies in the long term. When comparing 2000's non-interest expense information to 1999's results, a portion of the increase is due to the costs associated with the Trust Preferred Securities (combination of debt service expenses and amortization of associated capitalized issuance costs) and the timing of its issuance in 1999. Costs relating to the Trust Preferred Securities totaled $2,623,000 in 2000, an increase of $783,000 (or 42.6%) compared to 1999. Salaries and benefits expense represents the largest component of non-interest expense. In 2000, salaries and benefits totaled $13,503,000 in 2000, up $1,679,000 (or 14.2%) compared to a year ago, accounting for a majority of the overall increase in non-interest expense. The increase in wages and benefits is due to commissions paid to insurance and investment associates, wage increases necessary to retain key personnel in the competitive labor market and corresponding increases in benefits, as well as modest increases in the number of Peoples' customer service associates. At December 31, 2000, Peoples had 388 full-time equivalent employees versus 385 at December 31, 1999. Management will continue to leverage its resources while retaining key associates, effectively optimizing customer service and return to shareholders. Acquisitions and investments designed to enhance client service processes also affected net occupancy and furniture and equipment expenses, in particular depreciation expense. These expenses totaled $3,900,000, an increase of $274,000 (or 7.6%) compared to $3,626,000 in 1999. These increases can be attributed primarily to the depreciation of assets acquired through recent market expansion and construction projects at several of Peoples Bank's financial service centers (specifically three Wal-Mart Financial Service Centers opened in 1999 and 2000, as well as other banking center refurbishments), and increased depreciation of additional expenditures on technology. Peoples' increased investment in technology and other customer-service enhancements, designed to add convenience and speed to product delivery, will also impact depreciation expense in the future. Management believes that Peoples' ability to serve a core sector of its markets in a cost effective manner is tied to its technology-based delivery channels. Maintaining acceptable levels of non-interest expense and operating efficiency are key performance indicators for Peoples in its strategic initiatives. The financial services industry uses the efficiency ratio (total non-interest expense less amortization of intangibles and non-recurring items as a percentage of the aggregate of fully tax equivalent net interest income and non-interest income) as an important indicator of performance. Gains and losses on sales of investment securities, as well as other nonrecurring charges, are not included in the calculation of Peoples' efficiency ratio. Management also compares non-interest income as a percentage of operational non-interest expense, which totaled 31.4% in 2000 compared to 29.8% in 1999. In 2000, Peoples' efficiency ratio was 57.12% compared to 1999's ratio of 53.94%. The combination of compressed net interest margins and increased levels of non-interest expense have negatively affected Peoples' efficiency ratio. Management believes current investments in and expansion of client service efforts helps Peoples accomplish its goal of improving convenience, flexibility, and speed for clients. In 2001, management will focus on reducing non-interest expense growth rates without sacrificing client service levels or slowing Peoples' expansion into non-traditional products and services. RETURN ON EQUITY After removing the impact of intangibles and corresponding amortization, return on tangible equity increased to 22.90% in 2000 compared to 20.96% in 1999. Peoples' return on average stockholders' equity ("ROE") was 14.92% in 2000 compared to 13.27% a year earlier. Using a portion of the proceeds from the Trust Preferred Securities issuance, Peoples implemented Stock Repurchase Programs that have favorably impacted ROE through the reduction in the number of outstanding common shares and the corresponding reduction in equity. Similar capital management enhancements to ROE will depend on the timing of common share repurchases and the availability of Peoples' common shares through the recently announced 2001 Stock Repurchase Program. Peoples and its banking subsidiaries are considered well-capitalized under regulatory and industry standards of risk-based capital (as discussed in Note 13 of the Notes to Peoples' Consolidated Financial Statements) and such ratios grew stronger in 2000. RETURN ON ASSETS After removing the impact of intangibles and corresponding amortization, return on tangible assets was 1.19% in 2000 versus 1.30% in 1999. Return on average assets ("ROA") was 1.02% in 2000 compared to 1.09% a year ago. The Leverage Strategy implemented in 1999 significantly increased the Peoples' asset base and caused a reduction in Peoples' tangible return on assets and ROA. Additional net interest income from the Leverage Strategy was offset primarily by the Trust Preferred Securities costs, resulting in lower ROA levels than previous periods. Management anticipates that ROA will remain relatively unchanged through the first part of 2001. Peoples will be challenged to employ its asset base in a manner that will produce higher returns on assets. Management intends to continue Peoples' strategic focus on ratios such as return on tangible equity, return on equity, cash earnings per share, and earnings per share. INCOME TAX EXPENSE Peoples has implemented tax reduction strategies, including investments in low income housing and historic tax credits, to reduce tax burden and lower effective tax rate. In 2000, Peoples' effective tax rate was 29.7% versus 31.0% in 1999 reflecting the success of these strategies. At December 31, 2000, Peoples' cumulative investment in these types of projects approximated $3.1 million. Peoples plans to make additional investments in various tax credit pools over the next several years with the total investment not expected to exceed $7 million. These investments are expected to benefit Peoples' future results of operations by reducing Peoples' effective tax rate. Management anticipates a similar effective tax rate in 2001 due to these investments and continues to explore other ways to reduce Peoples' tax burden. OVERVIEW OF THE BALANCE SHEET Total assets were $1.14 billion at December 31, 2000, an increase of $60.4 million (or 5.6%) compared to year-end 1999. Loan volume increased $77.1 million (or 11.7%) to $737.0 million, with most of the growth occurring in real estate and commercial loans. Total liabilities increased $50.0 million (or 5.1%) since year-end 1999 to $1.02 billion at December 31, 2000. Due to growth of Peoples' interest bearing deposits, particularly money market accounts, Peoples' total deposits increased $29.4 million (or 4.0%) to $757.6 million in 2000. Peoples' total short-term borrowings increased $32.5 million (or 37.1%) to $119.9 million at December 31, 2000. The April 1999 issuance of the Trust Preferred Securities is presented as "Guaranteed Preferred Beneficial Interest in Junior Subordinated Debentures." Peoples has classified the Trust Preferred Securities as "mezzanine" equity on its balance sheet, net of issuance costs of approximately $1.0 million, which are amortized over the term of the security indebtedness. Stockholders' equity totaled $83.2 million at December 31, 2000, an increase of $10.3 million (or 14.2%) since December 31, 1999. At December 31, 1999, Peoples had $7.7 million of net unrealized losses on available-for-sale securities compared to $3.0 million of unrealized losses on available-for-sale securities at December 31, 2000. Peoples had a treasury share balance of $10.8 million at year-end 1999, compared to $3.6 million at December 31, 2000. In the first quarter of 2000, Peoples reissued treasury shares in connection with a 10% stock dividend to shareholders. Peoples expects to purchase treasury shares through the 2001 Stock Repurchase Plan, as appropriate and the stock benefit plans repurchase program as well as the deferred compensation plan that permits Peoples' directors to acquire common shares through deferral of director fees. CASH AND CASH EQUIVALENTS Peoples' cash and cash equivalents totaled $28.4 million at December 31, 2000, a decrease of $15.3 million compared to 1999. At year-end 1999, Peoples retained additional cash reserves for potential customer withdrawals related to the Y2K date change. Since Peoples did not experience any significant withdrawals, management redeployed the excess cash into earning assets in January 2000. Normally, management directs liquid funds into higher-yielding assets such as loans to meet loan demand in its markets and enhance profitability. Management believes the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that mature within one year adequately serve Peoples' liquidity and performance needs. While total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity needs, these other sources of funds should enable Peoples to meet cash obligations and off-balance sheet commitments as they occur. INVESTMENT SECURITIES Investment securities totaled $330.5 million at year-end 2000, up $2.2 million (or 0.7%) compared to December 31, 1999, as a result of modest increases in the market value of the investment portfolio. All of Peoples' investment securities are classified as available-for-sale. Management believes the available-for-sale classification provides flexibility for Peoples in terms of selling securities as well as interest rate risk management opportunities. At December 31, 2000, the amortized cost of Peoples' investment securities totaled $335.1 million, resulting in unrealized depreciation in the investment portfolio of $4.6 million and a corresponding decrease in equity of $3.0 million. Investments in U.S. Treasury securities and obligations of U.S. government agencies and corporations increased $5.3 million to $106.0 million at December 31, 2000. In 2000, investments in mortgage-backed securities decreased $3.9 million to $143.5 million and represented the largest segment of Peoples' investment securities portfolio. Peoples' balances in investment obligations of states and political subdivisions totaled $38.5 million at December 31, 2000, an increase of $3.3 million since year-end 1999. Corporate and other investments at December 31, 2000, totaled $42.5 million, a decrease of $2.5 million since year-end 1999. Management may reduce investment securities in future periods as a mechanism to fund higher-yielding assets such as loans. Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through Asset/Liability Committee ("ALCO") meetings. The group also monitors net interest income, sets pricing guidelines, and manages interest rate risk for the Company. Through active balance sheet management and analysis of the investment securities portfolio, the Company maintains sufficient liquidity to satisfy depositor requirements and the various credit needs of its customers. Management believes the risk characteristics inherent in the investment portfolio are acceptable based on these parameters. LOANS Peoples' lending is primarily focused in central and southeastern Ohio, northern West Virginia, and northeastern Kentucky markets, and consists principally of retail lending, which includes single-family residential mortgages and other consumer loans. Gross loans totaled $737.0 million at December 31, 2000, an increase of $77.1 million (or 11.7%) since year-end 1999. Retail loan growth occurred primarily in Peoples' existing markets, while some commercial lending growth came from selected customers outside Peoples' primary geographic markets. Peoples experienced significant loan growth during 2000 in commercial, financial, and agricultural loans ("commercial loans"), which increased $38.3 million (or 14.1%) to $310.6 million. At December 31, 2000, commercial loans comprised 42.1% of Peoples' total loan portfolio and represented the largest portion of the loan portfolio. Economic conditions in Peoples' markets have provided quality credit opportunities, in particular, in southeastern and central Ohio. Management will continue to focus on the enhancement and growth of the commercial loan portfolio while maintaining appropriate underwriting standards and risk/price balance. Management expects commercial loan demand to moderate somewhat in 2001. In addition to the anticipated additional in-market penetration, Peoples will continue to selectively lend to customers outside its primary markets. Real estate loans to Peoples' retail customers (including real estate construction loans) account for the second largest portion of the loan portfolio, comprising 41.2% of Peoples' total loan portfolio. Real estate mortgage loans totaled $303.6 million at December 31, 2000, up $37.1 million (or 13.9%) since year-end 1999. Included in real estate loans are home equity credit lines ("Equilines"), which totaled $26.1 million at December 31, 2000, compared to $22.2 million at December 31, 1999. During 2000, Peoples offered a specially priced Equiline product to qualifying customers, which contributed to the Equiline balance increase. Management believes the Equiline loans are a competitive product with an acceptable return on investment after risk considerations. Residential real estate lending continues to represent a major focus of Peoples' lending due to the lower risk factors associated with this type of loan and the opportunity to provide additional products and services to these consumers at reasonable yields to Peoples. Consumer lending continues to be a vital part of Peoples' core lending. In 2000, consumer loan balances (excluding credit card loans) increased $1.5 million (or 1.3%) to $115.9 million. The majority of Peoples' consumer loans are in the indirect lending area, which had loan balances of $71.2 million at December 31, 2000, compared to $69.9 million at December 31, 1999. Peoples' credit card balances at December 31, 2000, totaled $6.9 million, up $0.2 million (or 2.9%) since year-end 1999. While management continues to explore new opportunities to serve credit card customers, those plans do not include the assumption of additional unnecessary risk merely for the sake of growth. Management is pleased with the performance and quality of Peoples' consumer loan portfolio, which can be attributed to Peoples' commitment to a high level of customer service and the continued demand for indirect loans in the markets served by Peoples. Lenders use a tiered pricing system that enables Peoples to apply interest rates based on the corresponding risk associated with the indirect loan. Although consumer debt delinquency has increased in the financial services industry (due mostly to credit card debt), management's actions to reinforce Peoples' pricing system and underwriting criteria have tempered indirect lending delinquencies. Management plans to continue its focus on the use of this tiered pricing system in the future, combined with controlled growth of the indirect lending portfolio if economic conditions remain strong. LOAN CONCENTRATION Peoples' largest concentration of commercial loans is in credits to assisted living facilities/nursing homes, which comprised approximately 11.6% of Peoples' outstanding commercial loans at December 31, 2000, compared to 7.2% at year-end 1999. These lending opportunities have arisen due to recent industry growth in certain markets or contiguous areas. Management believes Peoples' loans to assisted living facilities/nursing homes do not present more than the normal amount of risk assumed in other types of lending. While loans to assisted living facilities/nursing homes comprise the largest portion, loans to lodging and lodging related companies also represent a significant portion of Peoples' commercial loans. At December 31, 2000, lodging and lodging related loans accounted for 10.6% of Peoples' outstanding commercial loans, compared to 12.6% at year-end 1999. ALLOWANCE FOR LOAN LOSSES The loan portfolio analysis on pages 11 and 12 of this Form 10-K presents in detail an analysis of Peoples' loan portfolio, the allowance for loan losses, loan chargeoffs and recoveries by type of loan, and an allocation of the allowance for loan losses by major loan type. Management continually monitors the loan portfolio through its Loan Review Department and Loan Loss Committee to determine the adequacy of the allowance for loan losses. This formal analysis determines the appropriate level of the allowance for loan losses, allocation of the allowance among loan types and the adequacy of the unallocated component of the allowance. The portion of the allowance allocated among the various loan types represents management's estimate of expected losses based upon specific allocations for individual lending relationships, historical loss experience for each category of loans, and other economic factors. The individual loan reviews are based upon specific qualitative and quantitative criteria, including the size of the loan and loan grades below a predetermined level. The historical experience factor is based upon historical loss experience, trends in losses and delinquencies, the growth of loans in particular markets and industries, and known changes in economic conditions in the particular lending markets. Allowances for homogeneous loans (such as residential mortgage loans, credit cards, personal loans, etc.) are collectively evaluated upon historical loss experience, trends in losses and delinquencies, the growth of loans in particular markets, and known changes in economic conditions in the particular lending markets. The unallocated portion of the allowance is based upon management's assessment of qualitative risk factors that may not be evident in Peoples' historical experience, such as, but not limited to, changes in specific markets in both competition for loans and local economies. This assessment involves a high degree of management judgment as well as higher amounts of uncertainty. Assessment of the adequacy of the allowance is a dynamic process that requires management to continually refine the process as markets, economic conditions, and the company change. Differences between actual loss experiences and estimated events are compared on a quarterly basis, allowing management to regularly modify loss provisions as deemed appropriate based on market conditions and other factors previously described. The results of this analysis at December 31, 2000, indicated an increase in the amount allocated to the commercial category resulting from recent increases in Peoples' commercial loans outstanding and recent loss trends. The amount allocated to the remaining categories and the unallocated portion reflect the growth in the portfolios and changes in economic conditions. Management expects continued loan growth in 2001 and believes that the provision for losses will increase in the first quarter of 2001compared to the recent quarterly expense of $600,000. Peoples' consumer loan net chargeoffs continue to comprise the largest portion of total net chargeoffs, reaching $715,000 in 2000 and accounting for 43.2% of total net chargeoffs. In comparison to 1999, consumer loan net chargeoffs increased $87,000 (or 13.9%) due to increased indirect loan chargeoffs. Commercial loan net chargeoffs totaled $702,000 in 2000, an increase of $440,000 over 1999. Although commercial loan net chargeoffs in 2000 grew significantly higher in comparison to 1999, management believes 2000's results are more reflective of Peoples' historical commercial loan chargeoff experience. Credit card net chargeoffs decreased $12,000 in comparison to 1999 to $167,000 in 2000. Real estate loan net chargeoffs were insignificant in 2000, demonstrating the quality of the portfolio. Management evaluates Peoples' loan portfolio quality by monitoring the amount of nonperforming loans as a percentage of total loans. Nonperforming loans include loans 90 days or more past due, renegotiated loans, and loans classified as nonaccrual. At December 31, 2000, nonperforming loans totaled $5,142,000 compared to $2,105,000 in 1999 or 0.70% and 0.32% of total outstanding loans, respectively. The increase in nonperforming loans is due primarily to approximately $2 million of commercial loans from several different industries being placed on nonaccrual status in late 2000. Management considered these loans in establishing the allowance for loan losses at December 31, 2000. Peoples has taken aggressive steps to deal with the nonperforming loans. Despite the increase, management believes the current level of nonperforming loans is below peer group levels and is a reflection of the overall quality of Peoples' loan portfolio. A loan is considered impaired when, based on current information and events, it is probable that Peoples will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of potential impaired loan losses is generally based on the present value of expected future cash flows discounted at the loan's historical effective interest rate, or the fair value of the collateral if the loan is collateral dependent. If foreclosure is probable, impairment loss is measured based on the fair value of the collateral. At December 31, 2000, the recorded investment in loans that were considered to be impaired under Statement of Financial Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended by SFAS No. 118, was $9.1 million of which $5.3 million was accruing interest, and $3.8 million was nonaccrual loans. Included in this amount is $5.9 million of impaired loans for which the related allowance for loan losses is $2.0 million. The remaining impaired loan balances of $3.2 million do not have a related allocation of the allowance for loan losses as a result of write-downs, being well-secured, or possessing characteristics demonstrating ability to repay the loan. The average recorded investment in impaired loans in 2000 was approximately $8.8 million. In 2000, Peoples recognized interest income on impaired loans of $535,000, or 0.63% of Peoples' total interest income in the same period. FUNDING SOURCES Peoples considers a number of alternatives, including but not limited to deposits, short-term borrowings, and long-term borrowings when evaluating funding sources. Traditional deposits continue to be the most significant source of funds for Peoples, totaling $757.6 million, or 74.6% of Peoples' funding sources at December 31, 2000. Non-interest bearing deposits are core funding sources for Peoples. At December 31, 2000, non-interest bearing balances totaled $85.0 million, a $1.7 million (or 2.1%) increase compared to year-end 1999. Management intends to continue to focus on maintaining its base of lower-costing funding sources through product offerings that benefit customers who enhance their relationship with Peoples by using multiple products and services. Interest-bearing deposits totaled $672.6 million at December 31, 2000, an increase of $27.7 million (or 4.3%) compared to year-end 1999. Interest-bearing transaction accounts were the largest growth component of Peoples' deposits, increasing $41.7 million (or 19.5%) to $256.5 million at December 31, 2000, due primarily to growth in Peoples' money market account balances. Peoples' money market accounts offer variable, competitive rates that allow clients some flexibility of transactions and the opportunity to earn higher investment yields. In addition to growth of balances in money market accounts, Peoples offered a 17-month CD "special" throughout 2000. This product provided an attractive rate of return for customers, increased Peoples' competitive position to retain and grow deposits and helped fund loan growth. In early 2001, Peoples replaced the 17-month CD "special" with a 7-month CD "special." Management will continue to emphasize deposit-gathering in the future by offering special "relationship accounts" (both non-interest bearing and interest-bearing) based on other products and services offered while balancing deposit growth with adequate net interest margin to meet Peoples' strategic goals. While traditional deposits serve as core funding sources, Peoples also accesses both short-term and long-term borrowings to fund its operations and investments. Peoples' short-term borrowings consist of federal funds purchased, commercial deposits held in overnight repurchase agreements, wholesale funds such as term repurchase agreements, and various FHLB borrowings. At December 31, 2000, short-term borrowings totaled $119.9 million, an increase of $32.5 million (or 37.1%) over year-end 1999. The largest component of Peoples' short-term borrowing at December 31, 2000, was FHLB advances of $65.2 million, an increase of $42.7 million (or 190%), of which $11.5 million of the increase can be attributed to repayments of certain long-term, callable FHLB advances using short-term, repo-based FHLB advances. Growth in borrowings, such as FHLB advances, was due primarily to fund loan growth. In addition to short-term FHLB advances, Peoples had total short-term, national market repurchase agreement balances of $25.8 million at December 31, 2000, a decrease of $8.2 million (or 24.1%) compared to year-end 1999. Peoples also had $28.8 million of commercial overnight repurchase agreement balances with its customers at December 31, 2000, down $1.7 million (or 5.6%) from a year ago. Short-term FHLB advances and national market repurchase agreements were accessed heavily at the end of 1999 to fund Peoples' Y2K cash reserves for potentially large customer deposit withdrawals. Those borrowings were repaid in early January 2000; however, Peoples continued to access these funding sources at various times during the year to balance liquidity needs and fund loan growth. Peoples also maintains long-term borrowing capacity with the FHLB. Long-term FHLB advances decreased $11.5 million (or 7.8%) since year-end 1999, totaling $136.4 million at December 31, 2000. Peoples' long-term FHLB advances are primarily 10-year borrowings, with fixed rate features for periods of two, three, or four years, depending on the specific advance. Each advance, at the discretion of the FHLB, may reprice after its initial fixed rate period, and Peoples has the option to repay any repriced advance without penalty, or allow the borrowing to reprice to a LIBOR based, variable product. In June 2000, management opted to repay long-term FHLB advances that would have repriced to current market rates of interest to take advantage of potential cost savings using other available short-term advances. Management plans to maintain access to long-term FHLB borrowings as an appropriate funding source. Peoples also has a variable rate, long-term note with an unaffiliated financial institution. The original principal balance of the note was $3.0 million and was used to finance an acquisition in early 1997. Principal payments began in 1998 and continue semiannually over the next three years. At December 31, 2000, the balance was $2.1 million, a decrease of $0.3 million since year-end 1999. CAPITAL/STOCKHOLDERS' EQUITY During the year ended December 31, 2000, stockholders' equity increased approximately $10.3 million (or 14.2%) to $83.2 million. In 2000, Peoples had net income of $11.1 million and paid dividends of $3.7 million, a dividend payout ratio of 33.1% of earnings, compared to a ratio of 31.8% in 1999. Management believes recent dividends represent an acceptable payout ratio for Peoples and anticipates similar payout ratios in future periods through quarterly dividends. At December 31, 2000, the adjustment for the net unrealized holding loss on available-for-sale securities, net of deferred income taxes, totaled $3.0 million, a change of $4.7 million since year-end 1999. Since all the investment securities in Peoples' portfolio are classified as available-for-sale, both the investment and equity sections of Peoples' balance sheet are more sensitive to the changing market values of investments. The changes in market value of Peoples' investment portfolio directly impacted Peoples' stockholders' equity. Management believes Peoples' capital continues to provide a strong base for profitable growth. Banking regulators have established risk-based capital requirements designed to measure capital adequacy and the relative risks of various assets banks hold in their portfolios through risk-based capital ratios. As part of these requirements, each asset is assigned a risk weight category of 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets). Peoples and Peoples Bank have complied with these requirements. Detailed information concerning Peoples' risk-based capital ratios can be found in Note 13 of the Notes to the Consolidated Financial Statements. At December 31, 2000, Peoples' and Peoples Bank's risk-based capital ratios were above the minimum standards for a well-capitalized institution. Peoples' risk-based capital ratio of 14.21% at December 31, 2000, is well above the well-capitalized standard of 10%. Peoples' Tier 1 capital ratio of 12.83% also exceeded the well-capitalized minimum of 6%. The Leverage ratio at year-end 2000 was 9.62% and was also above the well-capitalized standard of 5%. Since April 1999, Peoples has repurchased common shares through the 1999 and 2000 Stock Repurchase Programs. During 2000, Peoples purchased 103,000 shares in open market and privately negotiated transactions at a weighted average price of $16.17 per share. Peoples is authorized to purchase up to 125,000 shares (or 2% of outstanding shares) in 2001 as part of the 2001 Stock Repurchased Program. The timing of the purchases and the actual number of common shares purchased have depended and will continue to depend on market conditions. In June 1998, Peoples implemented a formal plan to purchase treasury shares for use in its stock option plans. The formal plan serves as the basis for treasury purchases in anticipation of Peoples' projected stock option exercises and is based upon specific criteria related to market prices, as well as the number of common shares expected to be reissued under Peoples' stock option plans. Under the plan, Peoples is currently authorized to repurchase 18,150 common shares each quarter. During 2000, Peoples purchased 56,450 treasury shares at a weighted-average price of $17.64 per share, totaling $1.0 million. Management expects to purchase similar share amounts in future quarters for use in its stock option plans. Future changes, if any, to Peoples' systematic share repurchase program may be necessary to respond to the number of common shares expected to be reissued for Peoples' stock option plans. Management intends to continue its systematic quarterly treasury share program. Peoples also maintains the Peoples Bancorp Inc. Deferred Compensation Plan ("Deferred Compensation Plan") for the directors of Peoples and its subsidiaries. The Deferred Compensation Plan is designed to recognize the value to Peoples of the past and present service of its directors and encourage their continued service through implementation of a deferred compensation plan. The Deferred Compensation Plan allows directors to direct the fees earned for their services into deferred accounts that are invested either in Peoples' common shares or in time deposits, at the specific director's discretion at the time of entering the Plan. As a result and in accordance with accounting regulations, the account balances invested in Peoples' common shares are reported as treasury stock in Peoples' financial statements. At December 31, 2000, the Deferred Compensation Plan and its participants were entitled to $0.9 million of Peoples' common shares, which is a reduction to the equity balance of Peoples. Management does not expect the Deferred Compensation Plan to have a material impact on future financial statements or results of operations of Peoples. LIQUIDITY AND INTEREST RATE SENSITIVITY The objective of Peoples' asset/liability management function is to maintain consistent growth in net interest income within Peoples' policy guidelines. This objective is accomplished through management of Peoples' balance sheet liquidity and interest rate risk exposure based on changes in economic conditions, interest rate levels, and customer preferences. Interest Rate Risk - ------------------ The most significant risk resulting from Peoples' normal business of extending loans and accepting deposits, is interest rate risk. Interest rate risk ("IRR") is the potential for economic loss due to future interest rate changes which can impact both the earnings stream as well as market values of financial assets and liabilities. Peoples' management has charged the ALCO with the overall management of Peoples' and its subsidiary bank's balance sheet and off-balance sheet transactions related to the management of IRR. The ALCO strives to keep Peoples focused on the future, anticipating and exploring alternatives, rather than simply reacting to change after the fact. To this end, the ALCO has established an interest rate risk management policy that sets the minimum requirements and guidelines for monitoring and controlling the level and amount of interest rate risk. The objective of the interest rate risk policy is to encourage management to adhere to sound fundamentals of banking while allowing sufficient flexibility to exercise the creativity and innovations necessary to meet the challenges of changing markets. The ultimate goal of these policies is to optimize net interest income within the constraints of prudent capital adequacy, liquidity, and safety. Peoples' ALCO relies on different methods of assessing interest rate risk including simulating net interest income, monitoring the sensitivity of the net present market value of equity, and monitoring the difference or gap between maturing or rate-sensitive assets and liabilities over various time periods. The ALCO places emphasis on simulation modeling as the most beneficial measurement of interest rate risk because it is a dynamic measure. By employing a simulation process that measures the impact of potential changes in interest rates and balance sheet structures and by establishing limits on changes in net income and net market value, the ALCO is better able to evaluate the possible risks associated with alternative strategies. The simulation process starts with a base case simulation that represents projections of current balance sheet growth trends. Base case simulation results are prepared under an assumed flat interest rate scenario and at least two alternative interest rate scenarios, one rising and one declining, assuming parallel yield curve shifts. Comparisons showing the earnings variance from the flat rate forecast illustrate the risks associated with the current balance sheet strategy. When necessary, additional balance sheet strategies are developed and simulations prepared. These additional simulations are run with the same interest rate scenarios used with the base case simulation and/or using different yield curves. The additional strategies are used to measure yield curve risk, prepayment risk, basis risk, and index lag risk inherent in the balance sheet. Comparisons showing the earnings and equity value variance from the base case provide the ALCO with information concerning the risks associated with implementing the alternative strategies. The results from model simulations are reviewed for indications of whether current interest rate risk strategies are accomplishing their goal and, if not, the ALCO evaluates alternative strategies. The ALCO periodically reviews the appropriateness of the assumptions used in the modeling and the overall techniques employed. Peoples monitors interest rate risk for both the short and long-term. Therefore, to effectively evaluate results from model simulations, limits on changes in net interest income and the value of the balance sheet have been established. To monitor the short-term exposure to interest rate risk, the ALCO limited the earnings at risk of the bank to 10% or less from base case for each 1% shift in interest rates. To monitor the long-term exposure to interest rate risk, management has limited the negative impact on net equity value to 40% or less when interest rates shift 2% and 75% when rates shift 4%, respectively. For an assessment of the current interest rate risk position, the ALCO reviews static gap measures for specific time periods focusing on one-year cumulative gap. Based on historical trends and performance, the ALCO has determined that the ratio of the one-year cumulative gap should be within 15% of earning assets. The following table is provided to show the estimated earnings at risk and value at risk positions of Peoples at December 31, 2000 (dollars in thousands): Immediate Interest Rate Estimated Estimated Increase (Decrease) in (Decrease) Increase (Decrease) Increase in Basis Points In Net Interest Income Economic Value of Equity 300 $ (5,351) (13.4)% $(10,052) (9.6)% 200 (3,550) (8.9) (7,118) (6.8) 100 (1,766) (4.4) (3,779) (3.6) (100) 1,513 3.8 3,259 3.1 (200) 3,010 7.6 6,946 6.6 (300) $ 4,492 11.3 % $ 11,102 10.6 % The interest risk analysis shows that Peoples is moderately liability sensitive. This means that downward moving interest rates should favorably impact net interest income and upward moving interest rates should negatively impact net interest income. The analysis also shows that for all simulations and all scenarios, Peoples is within the interest rate risk limits that the ALCO has established in the policy. Peoples was within the policy limits at all measured points during the preceding year. The liability sensitivity increased in the past twelve months due to the loan growth Peoples experienced in 2000. To protect earnings streams should there be an increase in interest rates (or hedge the liability sensitivity), the ALCO authorized the purchase of interest rate options, termed caps, that will provide additional income if there is a significant increase in interest rates. Liquidity - --------- Maintenance of a sufficient level of liquidity is a primary objective of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet anticipated and unanticipated operating cash needs, loan demand, and deposit withdrawals, without incurring a sustained negative impact on profitability. The ALCO's policy for liquidity management sets limits on the net liquidity position of Peoples and the concentration of non-core funding sources. The main source of liquidity for Peoples is deposit growth. Liquidity is also provided from cash generated from assets such as maturities, principal payments and income from loans and investment securities. In 2000, cash provided by financing activities totaled $44.5 million due to the growth of short-term borrowings and interest-bearing deposit growth, while outflows from investing activity totaled $75.7 million. The majority of the increase in cash outflows from investing activities occurred as a result of the growth in Peoples' loan portfolio. Peoples, when appropriate, takes advantage of external sources of funds such as advances from the Federal Home Loan Bank, national market repurchase agreements, and brokered funds. These external sources often provide attractive interest rates and flexible maturity dates that enable Peoples to match funding dates with contractual maturity dates of assets. Securities in the investment portfolio that are available for sale can be utilized as an additional source of liquidity. The net liquidity position of Peoples is calculated by subtracting volatile liabilities, non-core deposits and brokered funds, from liquid assets, short-term investments and unpledged available-for-sale securities. As of December 31, 1999, the net liquidity position of Peoples was $105.2 million (or 9.81% of total assets). As of December 31, 2000, the net liquidity position of Peoples was $99.2 million (or 8.74% of total assets). The decrease in 2000 is the result of maturities in available-for-sale securities, which were used to fund loan growth. The liquidity position as of year-end was within Peoples' policy limit of negative 10% of total assets. The ALCO believes Peoples has sufficient liquidity to meet current obligations to borrowers, depositors, debt holders, and others. EFFECTS OF INFLATION ON FINANCIAL STATEMENTS Substantially all of the Company's assets relate to banking and are monetary in nature. Therefore, they are not impacted by inflation to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in loss in purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In the banking industry, typically monetary assets exceed monetary liabilities. Therefore, as prices have recently increased, financial institutions experienced a decline in the purchasing power of their net assets. FUTURE OUTLOOK Despite recent challenges facing the financial services industry, Peoples attained several key financial goals in 2000 including double-digit growth in earnings per share, enhanced return on shareholders' equity, growth in loan balances, increased non-interest revenues, and continued expansion of Peoples' integrated, needs-based sales process using its CONNECTIONS theme to successfully grow client relationships. Part of the reason for Peoples' financial success in 2000 was the execution of the Stock Repurchase Programs, which helped to enhance return on shareholders' equity and earnings per share. Peoples' ability to achieve similar success in 2001 will be influenced by potential stock purchases under the 2001 Stock Repurchase Program, as well as numerous factors that affect the financial services industry such as interest rate changes. Peoples experienced growth in net interest income in 2000 even though rising interest rates, which negatively impacted Peoples' interest-bearing liabilities, were a continuing challenge. Management continues to refine and update its Asset/Liability simulation modeling process, most recently in response to interest rate reductions by the Federal Reserve in early 2001. Despite these reductions, net interest income and margins will be challenged in early 2001 as pricing pressure from other competitors further compresses margins, a challenge facing the entire financial services industry. Management has already taken steps to reduce longer-term interest rate exposure by lowering CD and IRA rates and terms from a 17-month "special" offered throughout 2000 to a 7-month "special." While this change should result in improved net interest income, any improvement will be at least partially offset by decreases in prime based commercial loans resulting from the Federal Reserve's recent 100 basis point decrease in rates. In early 2000, Peoples merged its three banking subsidiaries into a single national charter and incurred additional expenses, such as professional fees and regulatory costs, for first-year integration costs. The consolidation gives Peoples' clients access to all 40 sales offices, 27 ATMs, and Internet banking in addition to connecting the northeastern Kentucky markets with contiguous Ohio and West Virginia markets. While the merger has already produced many positive results in 2000, including enhanced ability to meet all the financial needs of Peoples' clients and reduced regulatory burden, Peoples' focus in 2001 will be further product integration and market penetration. The start of 2001 has already been marked by expansion with the opening of Peoples' Emerson Avenue Financial Services Center, Peoples' fourth banking center in Wood County, West Virginia. The office includes some unique features compared to Peoples' other sales offices such as a "Home Resource Center", an "Investment Resource Center" and an "Internet Cafe". Since opening on January 2 in Parkersburg, the Emerson Avenue Financial Services Center has been featured in AmericanBanker.com, local and regional newspapares, and other media outlets, for its creative layout and inviting customer service areas. Management believes the Emerson Avenue Financial Services Center is a model that can be duplicated in some of Peoples' existing sales office. In addition to the opening of the Emerson Avenue Financial Services Center, Peoples Bank opened its 40th sales office with the completion of the merger acquisition of Lower Salem Commercial Bank of Lower Salem, Ohio, on February, 23, 2001. Lower Salem represents an opportunity for Peoples to expand its presence in northern Washington County. Management's focus now shifts to the integration of non-traditional products, such as investments and insurance, with the traditional products Lower Salem currently offers. Peoples' personal relationships and electronic access connect clients with Peoples in ways not available a decade ago. E-commerce has generated much hype in recent years; however, Peoples has approached the e-world with the same "progressively conservative" attitude that has proven successful in its banking model. While technology such as the Internet, Peoples OnLine Connection and Peoples' TeleBank continue to be areas of focus, Peoples does not plan to supplant the personal contact that Peoples' traditional banking centers currently offer. Management believes such technology provides Peoples with new ways of enhancing product and service delivery and strengthening client relationships. In 2001, Peoples will continue to focus on increasing its fee-based business since the margin-based business is dependent on the unpredictable interest rate environment. One of Peoples' main goals is the complete integration of its traditional products with newer, non-traditional products, such as investments and insurance. Through this integration and continued focus, Peoples' clients will have access to a world of financial products through their preferred delivery channel. Management anticipates that a significant portion of future earnings growth will be derived from the expanded fee-base business. Mergers and acquisitions remain a viable strategic option for continuing growth of operations and scope of client service as well as a viable method of enhancing Peoples' earnings potential. Management will continue to pursue appropriate business opportunities that complement existing company locations and revenue growth strategies through a variety of means including mergers and acquisitions. Future acquisitions, if they occur, may not be limited to specific geographic location or proximity to current market, but ultimately will depend upon opportunities that complement Peoples' core competencies and strategic intent. Management believes Peoples is positioned for continued revenue growth in 2001 and beyond. Although competition for loans and deposits, as well as short-term borrowing costs, continue to impact Peoples' short-term profitability due to challenges to net interest income levels, management will continue to analyze and implement strategies designed to enhance the long-term value of Peoples. Peoples' many sales associates are firmly committed to client service and long-term stakeholder success. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Form 10-K which are not historical fact are forward looking statements that involve risks and uncertainties, including, but not limited to, the interest rate environment, the effect of federal and state banking and tax regulations, the effect of technological changes, the effect of economic conditions, the impact of competitive products and pricing, and other risks detailed in Peoples' Securities and Exchange Commission filings. Although management believe that the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management's knowledge of Peoples' business and operations, it is possible that actual results may differ materially from these projections. COMPARISON OF 1999 TO 1998 Peoples reported an increase in net income of 6.7%, to $10.7 million in 1999 from $10.0 million in 1998. Diluted earnings per share totaled $1.53 for the year ended December 31, 1999, compared to $1.40 in 1998. Cash basis earnings, which removes the after-tax impact of intangible amortization expense, increased $0.19 to $1.79 per diluted share for the year ended December 31, 1999, compared to $1.60 in 1998. Peoples' core earnings increased due to stronger earnings in existing business units and additional revenue streams associated with business acquisitions. For the year ended December 31, 1999, return on average assets was 1.09%, compared to 1.20% in 1998. The Leverage Strategy implemented during the second quarter of 1999 significantly increased Peoples' asset base thus causing the decrease in ROA. In 1999, return on stockholders' equity increased to 13.27% compared to 12.21% in 1998. Using a portion of the proceeds from the Trust Preferred Securities issuance, Peoples implemented the 1999 Stock Repurchase Program that reduced the number of outstanding common shares and total equity and enhanced ROE in 1999. Peoples recorded net interest income of $38.1 million in 1999, an increase of 17.5% compared to 1998, as total interest income reached $72.3 million and interest expense totaled $34.2 million. Net interest margin decreased in 1999 to 4.35% from 4.47% in 1998. Yield on earning assets totaled 8.14% in 1999, compared to 8.45% the prior year. A significant contributor to this decline was the decrease in Peoples' loan portfolio yield, which dropped 37 basis points to 8.83% in 1999 as a result of increased demand for loans in the markets Peoples serves. Compared to 1998, cost of interest-bearing liabilities decreased 25 basis points to 4.29% in 1999. Deposit costs decreased due to a combination of lowering time deposit rates and the acquisition of lower interest cost funding sources from the West Virginia Banking Center Acquisition. Peoples' provision for loan losses totaled $1,878,000 in 1999, down $447,000 compared to 1998, a decrease of 19.2%. Overall improvement in the loan portfolio's quality and associated credit risk combined with an adequate allowance for loan losses provided the basis to reduce the provision for loan losses during 1999. At December 31, 1999, Peoples' allowance for loan losses as a percentage of total loans was 1.56%, compared to a year-end 1998 ratio of 1.67%. Non-interest income from operations (excluding securities transactions) totaled $7,633,000 in 1999, an increase of 11.9% compared to 1998. In 1999, deposit account service charge income increased $497,000 (or 22.3%) to $2,730,000. A primary cause for this increase was a full-year's impact of the West Virginia Banking Center Acquisition and its associated $121 million in deposits, which provided the base for increased fee income. Income from fiduciary activities totaled $2,634,000, an increase of 13.3% compared to 1998. Electronic banking income totaled $1,033,000 in 1999, up $116,000 (or 12.6%) over the prior year. Electronic banking income increased primarily due to growth in the number of debit card users and the associated volume increases in debit card usage. For the year ended December 31, 1999, non-interest expense totaled $28,197,000, up $4,921,000 (or 21.1%) compared to 1998. The majority of the increase in 1999's non-interest expense is the result of acquisitions and the Trust Preferred Securities issuance. Compared to 1998, salaries and benefits expense increased $1,728,000 (or 17.1%) to $11,824,000 in 1999. Furniture and equipment expenses totaled $1,787,000 in 1999, up $59,000 (or 3.4%), and net occupancy expense totaled $1,839,000 in 1999, an increase of $242,000 (or 15.2%) compared to the previous year. These increases can be attributed primarily to the depreciation of the assets purchased in business acquisitions (in particular the West Virginia Banking Center Acquisition), and the completion of various branch banking office construction projects during 1999. Non-operational items also contributed to the increase in non-interest expense. In particular, amortization of intangibles totaled $2,639,000, up 546,000 (or 26.1%) compared to 1998, with most of the increase due to the West Virginia Banking Center Acquisition in 1999. Total assets reached $1.08 billion at December 31, 1999, up $195 million compared to year-end 1998. Asset growth can be attributed primarily to the Leverage Strategy implemented during the second quarter of 1999 with the largest growth occurring in the investment securities portfolio, which increased $95.7 million (or 39.4%) from year-end 1998 to $328.3 million at December 31, 1999. Loans continued to be the largest earning asset component for Peoples totaling $659.8 million at year-end 1999, an increase of $92.0 million (or 16.2%) compared to year-end 1998 due to continued loan demand in Peoples' established markets. While each of Peoples' loan categories experienced strong growth, a majority of the growth occurred in the commercial loan portfolio. Average loans totaled 85.1% of average deposits in 1999, up from 80.9% at year-end 1998. While Peoples considers a variety of funding sources, traditional deposits continue to be the most significant source of funds totaling $782.2 million, or 75.4% of Peoples' funding sources at December 31, 1999. In additional to traditional deposits, Peoples utilizes both short-term and long-term borrowings to fund operations and investments. Short-term borrowings totaled $87.4 million at year-end 1999, up $54.9 million since year-end 1998 while long-term borrowings totaled $150.3 million at December 31, 1999, compared to $40.7 million a year earlier. Short-term FHLB advances and national market repurchase agreements, which were accessed heavily at year-end 1999 to fund Peoples' Y2K cash reserves, accounted for a majority of the increase in short-term borrowings. As for the increase in long-term borrowings, Peoples advanced $110 million in FHLB borrowings to fund investment securities purchased in the Leverage Strategy. Total stockholders' equity decreased approximately $13.1 million to $72.9 million at December 31, 1999. This decrease is the result of implementing the 1999 Stock Repurchase Program and increased net unrealized holding losses on available-for-sale securities. At December 31, 1999, the adjustment for the net unrealized holding losses on available-for-sale securities totaled $7.6 million, a change of $11.2 million from the previous year. Peoples had a treasury share balance of $10.8 million at December 31, 1999, compared to $1.8 million at year-end 1998. In 1999, Peoples' dividend payout ratio was 31.8% of earnings compared to 30.4% in 1998. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - ------------------------------------------------------------------------ Please refer to pages 27 and 28 in Item 7 of this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - -------------------------------------------------------- The Consolidated Financial Statements and accompanying notes, and the report of independent auditors, are set forth immediately following Item 9 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - -------------------------------------------------------------------------- No response required. PEOPLES BANCORP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands except Share Data) December 31, ASSETS 2000 1999 Cash and cash equivalents: Cash and due from banks $ 28,242 $ 42,713 Interest-bearing deposits in other banks 207 1,038 - ------------------------------------------------------------------------------- Total cash and cash equivalents 28,449 43,751 - ------------------------------------------------------------------------------- Available-for-sale investment securities, at estimated fair value (amortized cost of $335,111 in 2000 and $340,082 in 1999) 330,521 328,306 - ------------------------------------------------------------------------------- Loans, net of deferred fees and costs 736,965 659,833 Allowance for loan losses (10,930) (10,264) - ------------------------------------------------------------------------------- Net loans 726,035 649,569 - ------------------------------------------------------------------------------- Bank premises and equipment, net 15,565 15,321 Other assets 35,264 38,503 - ------------------------------------------------------------------------------- TOTAL ASSETS $ 1,135,834 $ 1,075,450 =============================================================================== LIABILITIES Deposits: Non-interest bearing $ 84,974 $ 83,267 Interest bearing 672,647 644,940 - ------------------------------------------------------------------------------- Total deposits 757,621 728,207 - ------------------------------------------------------------------------------- Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 54,729 64,989 Federal Home Loan Bank advances 65,186 22,450 - ------------------------------------------------------------------------------- Total short-term borrowings 119,915 87,439 - ------------------------------------------------------------------------------- Long-term borrowings 138,511 150,338 Accrued expenses and other liabilities 7,572 7,606 - ------------------------------------------------------------------------------- TOTAL LIABILITIES 1,023,619 973,590 - ------------------------------------------------------------------------------- Guaranteed preferred beneficial interests in junior subordinated debentures ("Trust Preferred Securities") 29,021 28,986 Stockholders' Equity Common stock, no par value, 12,000,000 shares authorized, 6,679,028 shares issued in 2000 and 6,387,509 issued in 1999,including shares in treasury 66,364 65,043 Accumulated comprehensive income, net of deferred income taxes (2,983) (7,654) Retained earnings 23,381 26,241 - ------------------------------------------------------------------------------- 86,762 83,630 Treasury stock, at cost, 189,357 shares in 2000 and 398,662 shares in 1999 (3,568) (10,756) - ------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 83,194 72,874 - ------------------------------------------------------------------------------- TOTAL LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY $ 1,135,834 $ 1,075,450 =============================================================================== See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, except Per Share Data) Year ended December 31, 2000 1999 1998 INTEREST INCOME: Interest and fees on loans $ 63,352 $ 53,223 $ 48,857 Interest and dividends on: Obligations of U.S. government and its agencies 16,405 13,450 9,500 Obligations of states and political subdivisions 1,798 2,261 1,886 Other interest income 3,574 3,412 3,402 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 85,129 72,346 63,645 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: Interest on deposits 31,259 25,956 26,051 Interest on short-term borrowings 6,162 2,655 2,241 Interest on long-term borrowings 7,418 5,647 2,205 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 44,839 34,258 30,497 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 40,290 38,088 33,148 Provision for loan losses 2,322 1,878 2,325 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 37,968 36,210 30,823 - ------------------------------------------------------------------------------------------------------------------------------ OTHER INCOME: Service charges on deposit accounts 3,243 2,730 2,233 Income from fiduciary activities 2,608 2,634 2,325 Investment and insurance commissions 1,283 496 431 Electronic banking income 1,220 1,033 917 Gain (loss) on securities transactions 10 (104) 418 Other 564 740 914 - ------------------------------------------------------------------------------------------------------------------------------ Total other income 8,928 7,529 7,238 - ------------------------------------------------------------------------------------------------------------------------------ OTHER EXPENSES: Salaries and employee benefits 13,503 11,824 10,096 Trust Preferred Securities expense 2,623 1,840 -- Amortization of intangibles 2,284 2,639 2,093 Net occupancy 2,043 1,839 1,597 Equipment 1,857 1,787 1,728 Data processing and software 1,033 966 763 Supplies 653 661 779 Other 7,066 6,641 6,220 - ------------------------------------------------------------------------------------------------------------------------------ Total other expenses 31,062 28,197 23,276 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 15,834 15,542 14,785 - ------------------------------------------------------------------------------------------------------------------------------ Income taxes: Current 4,886 4,556 4,869 Deferred (178) 268 (129) - ------------------------------------------------------------------------------------------------------------------------------ Total income taxes 4,708 4,824 4,740 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 11,126 $ 10,718 $ 10,045 ============================================================================================================================== EARNINGS PER SHARE: Basic $ 1.71 $ 1.57 $ 1.44 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 1.69 $ 1.53 $ 1.40 - ------------------------------------------------------------------------------------------------------------------------------ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 6,523,808 6,846,071 6,975,989 - ------------------------------------------------------------------------------------------------------------------------------ Diluted 6,600,160 7,023,921 7,186,616 - ------------------------------------------------------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, except Share and Per Accumulated Share Data) Other Common Stock Retained Comprehensive Treasury Shares Amount Earnings Income (1) Stock Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 3,831,206 $ 50,001 $ 26,448 2,369 $ 0 $ 78,818 - ----------------------------------------------------------------------------------------------------------------------------------- Adjustment for the effect of 3-for-2 common stock split 1,915,603 Comprehensive Income: 10,045 10,045 Net Income Other Comprehensive income, net of tax: Unrealized gains on available-for-sale securities, Net of reclassification adjustment 1,219 1,219 ---------- Total comprehensive income 11,264 Purchase of treasury stock, 71,057 shares (2,059) (2,059) Exercise of common stock options (reissued 19,026 treasury shares) 28,451 370 237 607 Issuance of common stock under dividend reinvestment plan 14,888 436 436 Cash dividends declared of $0.44 per share (3,052) (3,052) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 5,790,148 $ 50,807 $ 33,441 3,588 $ (1,822) $ 86,014 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 10,718 10,718 Other Comprehensive income, net of tax: Unrealized loss on available-for-sale securities, Net of reclassification adjustment (11,242) (11,242) ---------- Total comprehensive income (524) Purchase of treasury stock, 379,636 shares (10,256) (10,256) Distribution of treasury stock from deferred compensation plan 5 5 10% stock dividend 579,505 14,512 (14,512) Exercise of common stock options (reissued 43,368 treasury shares) (838) 1,317 479 Tax benefit from exercise of stock options 121 121 Issuance of common stock under dividend reinvestment plan 17,856 441 441 Cash dividends declared of $0.50 per share (3,406) (3,406) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 6,387,509 $ 65,043 $ 26,241 (7,654) $ (10,756) $ 72,874 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 11,126 11,126 Other Comprehensive income, net of tax: Unrealized gains on available-for-sale securities, Net of reclassification adjustment 4,671 4,671 ---------- Total comprehensive income 15,797 Purchase of treasury stock, 148,321 shares (2,717) (2,717) Distribution of treasury stock from deferred compensation plan 125 125 10% stock dividend 269,597 1,469 (10,308) 8,839 Exercise of common stock options (reissued 39,517 treasury shares) (552) 941 389 Tax benefit from exercise of stock options 58 58 Issuance of common stock under dividend reinvestment plan 21,922 346 346 Cash dividends declared of $0.56 per share (3,678) (3,678) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 6,679,028 $ 66,364 $ 23,381 (2,983) $ (3,568) $ 83,194 - ----------------------------------------------------------------------------------------------------------------------------------- (1) Disclosure of reclassification amount for the years ended: 2000 1999 1998 Net unrealized appreciation (depreciation) arising during period, net of tax $ 4,678 $ (11,310) $ 1,491 Less: reclassification adjustment for net securities gains (losses) included in net income, net of tax 7 (68) 272 - ---------------------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) on investment $ 4,671 $ (11,242) $ 1,219 - ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Year ended December 31, 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,126 $ 10,718 $ 10,045 Adjustments to reconcile net income to net cash provided: Provision for loan losses 2,322 1,878 2,325 (Gain) loss on securities transactions (10) 104 (418) Depreciation, amortization, and accretion 4,613 4,997 5,095 Increase in interest receivable (1,029) (1,572) (630) Increase in interest payable 256 712 257 Deferred income tax (benefit) expense (178) 268 (129) Deferral of loan origination fees and costs (116) (1) 56 Other, net (1,054) (3,225) (3,325) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 15,930 13,879 13,276 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities (23,391) (174,750) (138,141) Proceeds from sales of available-for-sale securities 3,242 21,565 20,349 Proceeds from maturities of available-for-sale securities 25,337 43,507 58,964 Net increase in loans (78,375) (92,169) (26,955) Purchase of loans -- -- (11,772) Expenditures for premises and equipment (2,427) (2,156) (3,011) Proceeds from sales of other real estate owned 296 277 200 Acquisitions, net of cash received -- 4,010 100,170 Investment in limited partnership and tax credit funds (400) (1,336) (2,036) - ------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (75,718) (201,052) (2,232) - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in non-interest bearing deposits 1,707 576 5,234 Net increase (decrease) in interest bearing deposits 27,720 8,331 (19,489) Net increase (decrease) in short-term borrowings 32,476 54,925 (3,596) Proceeds from long-term borrowings -- 127,000 37,973 Payments on long-term borrowings (11,827) (17,326) (25,886) Cash dividends paid (3,262) (2,926) (2,538) Purchase of treasury stock (2,717) (10,255) (2,059) Proceeds from issuance of common stock for stock options 389 478 607 Proceeds from issuance of Trust Preferred Securities -- 30,000 -- - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 44,486 190,803 (9,754) - ------------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (15,302) 3,630 1,290 Cash and cash equivalents at beginning of year 43,751 40,121 38,831 - ------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,449 $ 43,751 $ 40,121 =============================================================================================================================== Supplemental cash flow information: Interest paid $ 39,415 $ 29,760 $ 26,831 - ------------------------------------------------------------------------------------------------------------------------------- Income taxes paid $ 3,960 $ 4,035 $ 5,542 - ------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: The accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries ("Peoples") conform to accounting principles generally accepted in the United States and to general practices within the banking industry. Peoples considers all of its principal activities to be banking related. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts to conform to the 2000 presentation. Such reclassifications had no impact on net income. The following is a summary of significant accounting policies followed in the preparation of the financial statements: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Peoples Bancorp Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash and due from banks, interest bearing deposits in other banks, and federal funds sold, all with original maturities of ninety days or less. INVESTMENT SECURITIES: Management determines the appropriate classification of investment securities at the time of purchase. Held-to-maturity securities are those securities that Peoples has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to Peoples' liquidity needs, changes in market interest rates, and asset-liability management strategies, among others. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses reported in a separate component of other comprehensive income, net of applicable deferred income taxes. The cost of securities sold is based on the specific identification method. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a level believed adequate by management to absorb losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on a quarterly evaluation of the portfolio, historical loan loss experience, current national and local economic conditions, volume, growth and composition of the portfolio, and other relevant factors. This evaluation is inherently subjective and requires management to make estimates of the amounts and timing of future cash flows on impaired loans, consisting primarily of non-accrual and restructured loans. The allowance for loan losses related to impaired loans is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. BANK PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. OTHER REAL ESTATE: Other real estate owned, included in other assets on the consolidated balance sheet, represents properties acquired by Peoples' subsidiary banks in satisfaction of a loan. Real estate is recorded at the lower of cost or fair value based on appraised value at the date actually or constructively received, less estimated costs to sell the property. INTANGIBLES: Intangible assets representing the present value of future net income to be earned from deposits are being amortized on an accelerated basis over a ten year period. The excess of cost over the fair value of net assets acquired (goodwill) is being amortized on a straight-line basis over periods ranging from 10 to 15 years. INCOME RECOGNITION: Interest income is recognized by methods which result in level rates of return on principal amounts outstanding. Amortization of premiums has been deducted from and accretion of discounts has been added to the related interest income. Nonrefundable loan fees and direct loan costs are deferred and recognized over the life of the loan as an adjustment of the yield. The subsidiary bank discontinues the accrual of interest when, in management's opinion, collection of all or a portion of contractual interest has become doubtful, which generally occurs when a loan is 90 days past due. When deemed uncollectible, previously accrued interest recognized in income in the current year is reversed and interest accrued in prior years is charged against the allowance for loan losses. Interest received on non-accrual loans is included in income only if principal recovery is reasonably assured. A non-accrual loan is restored to accrual status when it is brought current, has performed in accordance with contractual terms for a reasonable period of time, and the collectibility of the total contractual principal and interest is no longer in doubt. INTEREST RATE RISK MANAGEMENT: The premium paid to purchase interest rate caps is included in other assets and amortized to interest expense over the original term of the agreements. INCOME TAXES: Deferred income taxes (included in other assets) are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rate. The components of other comprehensive income included in the Consolidated Statements of Stockholders' Equity have been computed based upon a 35% effective tax rate. EARNINGS PER SHARE: Basic earnings per share is determined by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share is determined by dividing net income by the weighted-average number of shares outstanding increased by the number of shares that would be issued assuming the exercise of stock options. OPERATING SEGMENTS: Peoples' business activities are currently confined to one segment which is community banking. As a community banking entity, Peoples offers its customers a full range of products through various delivery channels. NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement, as amended by Statement Nos. 137 and 138, establishes new accounting and reporting requirements for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. Peoples adopted Statement No. 133 on January 1, 2001 as required. Because of Peoples' limited use of derivatives, the adoption of the new Statement is not expected to have a significant effect on Peoples' earnings or financial position. 2. Fair Values of Financial Instruments: The following methods and assumptions were used by Peoples in estimating its fair value disclosures for financial instruments in accordance with SFAS No. 107: CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet for these captions approximate their fair values. INVESTMENT SECURITIES: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices of comparable securities. LOANS: The fair value of performing variable rate loans that reprice frequently and performing demand loans, with no significant change in credit risk, is based on carrying value. The fair value of certain mortgage loans is based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair value of other performing loans (e.g., commercial real estate, commercial and consumer loans) is estimated using discounted cash flow analyses and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value for significant nonperforming loans is based on either the estimated fair value of underlying collateral or estimated cash flows, discounted at a rate commensurate with the risk. Assumptions regarding credit risk, cash flows, and discount rates are determined using available market information and specific borrower information. DEPOSITS: The carrying amounts of demand deposits, savings accounts and certain money market deposits approximate their fair values. The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation that applies current rates offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased, Federal Home Loan Bank advances, and securities sold under repurchase agreements approximate their fair values. LONG-TERM BORROWINGS: The fair value of long-term borrowings is estimated using discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms. TRUST PREFERRED SECURITIES: The fair value of the Trust Preferred Securities is estimated using discounted cash flow analysis based on current market rates of securities with similar risk and remaining maturity. INTEREST RATE CAPS AND FLOORS: Fair values for interest rate caps and floors are based on quoted market prices. FINANCIAL INSTRUMENTS: The fair value of loan commitments and standby letters of credit is estimated using the fees currently charged to enter into similar agreements considering the remaining terms of the agreements and the counterparties' credit standing. The estimated fair value of these commitments approximates their carrying value. The estimated fair values of Peoples' financial instruments are as follows: 2000 1999 Carrying Fair Carrying Fair (Dollars in Thousands) Amount Value Amount Value Financial assets: Cash and cash equivalents $ 28,449 $ 28,449 $ 43,751 $ 43,751 Investment securities 330,521 330,521 328,306 328,306 Loans 726,035 726,874 649,919 650,128 Financial liabilities: Deposits $ 757,621 $ 759,801 $ 728,207 $ 728,558 Short-term borrowings 119,915 119,908 87,439 87,439 Long-term borrowings 138,511 136,278 150,338 147,546 Other financial instruments: Trust Preferred Securities $ 29,021 $ 25,041 $ 28,986 $ 26,994 Off-balance sheet instruments: Interest rate caps $ 238 $ 92 $ -- $ -- Interest rate floors -- -- 6 -- Bank premises and equipment, customer relationships, deposit base, banking center networks, and other information required to compute Peoples' aggregate fair value are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of Peoples. 3. Investment Securities: The estimated maturities presented in the tables below may differ from the contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties. Rates are calculated on a taxable equivalent basis using a 35% federal income tax rate. The portfolio contains no single issue (excluding U.S. government and U.S. agency securities) that exceeds 10% of stockholders' equity.
Securities classified as available-for-sale Gross Gross At December 31, 2000 Amortized Unrealized Unrealized Estimated (Dollars in Thousands) Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 107,434 $ 436 $ (1,851) $ 106,019 Obligations of states and political subdivisions 38,117 544 (154) 38,507 Mortgage-backed securities 143,572 789 (856) 143,505 Other securities 45,988 1,511 (5,009) 42,490 - ----------------------------------------------------------------------------------------------- Total available-for-sale securities $ 335,111 $ 3,280 $ (7,870) $ 330,521 ===============================================================================================
Maturity distribution of available-for-sale securities
Contractual maturities at December 31, 2000 (Dollars in Thousands) U.S. Treasury Obligations securities and of states Total obligations of and Mortgage- available- U.S. government political backed Other for-sale agencies subdivisions securities securities securities Within one year Amortized cost $ 7,647 $ 325 $ 132 $ -- $ 8,104 Fair value $ 7,635 $ 140 $ 130 $ -- $ 7,905 Average yield 6.01 % 6.34 % 10.24 % -- % 6.09 % 1 to 5 years Amortized cost 29,629 1,652 2,348 1,836 35,465 Fair value 28,887 1,665 2,361 1,798 34,711 Average yield 6.03 % 6.23 % 6.65 % 6.65 % 6.12 % 5 to 10 years Amortized cost 66,755 9,185 7,867 1,502 85,309 Fair value 66,066 9,602 8,013 1,452 85,133 Average yield 6.47 % 7.42 % 6.40 % 6.94 % 6.57 % Over 10 years Amortized cost 3,403 26,955 133,225 42,650 206,233 Fair value 3,431 27,100 133,001 39,240 202,772 Average yield 7.15 % 7.13 % 6.77 % 8.50 % 7.18 % - ---------------------------------------------------------------------------------------------------- Total amortized cost $ 107,434 $ 38,117 $ 143,572 $ 45,988 $ 335,111 Total fair value $ 106,019 $ 38,507 $ 143,505 $ 42,490 $ 330,521 Total average yield 6.34 % 7.15 % 6.75 % 8.38 % 6.89 % ====================================================================================================
Securities classified as available-for-sale Gross Gross At December 31, 1999 Amortized Unrealized Unrealized Estimated (Dollars in Thousands) Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 105,169 $ 200 $ (4,680) $ 100,689 Obligations of states and political subdivisions 36,805 125 (1,774) 35,156 Mortgage-backed securities 152,788 203 (5,560) 147,431 Other securities 45,320 2,711 (3,001) 45,030 - ------------------------------------------------------------------------------------------------------------- Total available-for-sale securities $ 340,082 $ 3,239 $ (15,015) $ 328,306 ============================================================================================================= Securities classified as available-for-sale Amortized Gross Gross Estimated At December 31, 1998 Unrealized Unrealized (Dollars in Thousands) Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 49,249 $ 1,034 $ (40) $ 50,243 Obligations of states and political subdivisions 44,007 1,541 (15) 45,533 Mortgage-backed securities 104,067 811 (117) 104,761 Other securities 32,726 2,428 (122) 35,032 - ------------------------------------------------------------------------------------------------------------- Total available-for-sale securities $ 230,049 $ 5,814 $ (294) $ 235,569 =============================================================================================================
In 2000, 1999 and 1998, gross gains of $204,000, $229,000, and $523,000 and gross losses of $194,000, $333,000, and $105,000 were realized, respectively. At December 31, 2000 and 1999, investment securities having a carrying value of $237,550,000 and $112,310,000, respectively, were pledged to secure public and trust department deposits and repurchase agreements in accordance with federal and state requirements. 4. Loans: Loans are comprised of the following at December 31: (Dollars in Thousands) 2000 1999 Commercial, financial, and agricultural $ 310,558 $ 272,219 Real estate, construction 20,267 14,067 Real estate, mortgage 283,323 252,427 Consumer 122,817 121,120 - ---------------------------------------------------------------------------- Total loans $ 736,965 $ 659,833 ============================================================================ Changes in the allowance for loan losses for each of the three years in the period ended December 31, 2000, were as follows: (Dollars in Thousands) 2000 1999 1998 Balance, beginning of year $ 10,264 $ 9,509 $ 8,356 Charge-offs (2,061) (1,518) (1,645) Recoveries 405 395 473 - ------------------------------------------------------------------------- Net charge-offs (1,656) (1,123) (1,172) Provision for loan losses 2,322 1,878 2,325 Balances of acquired subsidiaries -- -- -- - ------------------------------------------------------------------------- Balance, end of year $ 10,930 $ 10,264 $ 9,509 ========================================================================= Peoples' lending is primarily focused in the local southeastern Ohio market and consists principally of retail lending, which includes single-family residential mortgages and other consumer lending. Peoples' largest groups of business loans consist of credits to assisted living facilities\nursing homes, as well as lodging and lodging related companies. Assisted living facilities\nursing homes loans totaled $35,877,000 and $19,563,000 at December 31, 2000 and 1999, respectively. The credits were subjected to Peoples' normal commercial underwriting standards and did not present more than the normal amount of risk assumed in other lending areas. Loans to lodging and lodging related companies totaled $32,991,000 and $34,379,000 at December 31, 2000 and 1999, respectively. Peoples does not extend credit to any single borrower or group of related borrowers in excess of the combined legal lending limits of its subsidiary bank. Impaired loans at December 31, 2000, totaled $9,057,000 and the average investment in impaired loans was $8,814,000 for the year ended December 31, 2000. Impaired loans at December 31, 1999, and the average investment in impaired loans for the year then ended were immaterial to the financial statements. In the normal course of its business, Peoples' subsidiary banks have granted loans to executive officers and directors of Peoples and to their associates. Related party loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with unrelated persons and did not involve more than normal risk of collectibility. The following is an analysis of activity of related party loans for the year ended December 31, 2000: (Dollars in Thousands) Balance, January 1, 2000 $ 23,092 New loans 11,728 Repayments (12,308) Other changes 959 - ----------------------------------------------------- Balance, December 31, 2000 $ 23,471 ===================================================== 5. Bank Premises and Equipment: The major categories of bank premises and equipment and accumulated depreciation are summarized as follows at December 31: (Dollars in Thousands) 2000 1999 Land $ 2,926 $ 2,786 Building and premises 17,768 16,548 Furniture, fixtures and equipment 11,009 10,380 - ----------------------------------------------------------------------- 31,703 29,714 Accumulated depreciation (16,138) (14,393) - ----------------------------------------------------------------------- Net book value $ 15,565 $ 15,321 ======================================================================= Peoples depreciates its building and premises and furniture, fixtures and equipment over estimated useful lives ranging from 5 to 20 years and 2 to 10 years, respectively. Depreciation expense was $1,957,000, $1,972,000 and $1,745,000, for the years ended December 31, 2000, 1999 and 1998, respectively. Peoples leases certain banking facilities and equipment under various agreements with original terms providing for fixed monthly payments over periods ranging from two to ten years. The future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 2000: (Dollars in Thousands) 2001 $ 262 2002 233 2003 227 2004 209 2005 190 Thereafter 680 - ------------------------------------------------------ Total minimum lease payments $ 1,801 ====================================================== Rent expense was $341,000, $306,000 and $242,000 in 2000, 1999 and 1998, respectively. 6. Deposits: Included in interest-bearing deposits are various time deposit products. The maturities of time deposits for each of the next five years and thereafter are as follows: $172,645,000 in 2001; $139,100,000 in 2002; $6,853,000 in 2003; $3,277,000 in 2004; $2,888,000 in 2005; and $575,000 thereafter. Deposits from related parties approximated $15.2 million and $13.0 million at December 31, 2000 and 1999, respectively. 7. Short-term Borrowings: Short-term borrowings are summarized as follows: Federal Funds Purchased National Funds Retail Market Short-term Purchased Repurchase Repurchase FHLB (Dollars in Thousands) Purchased Agreements Agreements Advances --------- ---------- ---------- ---------- 2000 Ending balance $ 162 $ 28,767 $ 25,800 $ 65,186 Average balance 209 31,162 27,497 40,454 Highest month end balance 587 35,572 34,010 69,586 Interest expense - YTD 12 1,675 1,779 2,696 Weighted average interest - ------------------------- End of year 5.21 % 4.24 % 6.68 % 6.75 % During the year 5.74 5.38 6.37 6.55 1999 Ending balance $ 501 $ 30,478 $ 34,010 $ 22,450 Average balance 137 30,171 18,606 5,477 Highest month end balance 501 31,502 35,000 22,450 Interest expense - YTD 7 1,294 1,058 296 Weighted average interest - ------------------------- End of year 2.66 % 5.07 % 6.05 % 4.75 % During the year 4.89 4.29 5.69 5.40 1998 Ending balance $ 131 $ 31,683 -- $ 700 Average balance 996 31,429 -- 12,534 Highest month end balance 1,725 33,457 -- 59,200 Interest expense - YTD 53 1,476 -- 712 Weighted average interest - ------------------------- End of year 4.18 % 4.52 % -- 5.32 % During the year 5.45 4.70 -- 5.68 Peoples utilizes FHLB advances and repurchase agreements as sources of funds. The advances are collateralized by mortgage-backed securities and loans. Peoples' institutional, national market repurchase agreements are with high quality, financially secure financial service companies. 8. Long-term Borrowings: Long-term borrowings consisted of the following at December 31: (Dollars in Thousands) 2000 1999 Term note payable, at LIBOR (parent company) $ 2,100 $ 2,400 Federal Home Loan Bank advances, bearing interest at rates ranging from 3.87% to 6.25% 136,411 147,938 - -------------------------------------------------------------------------------- Total long-term borrowings $ 138,511 $ 150,338 ================================================================================ The Federal Home Loan Bank ("FHLB") advances consist of various borrowings with maturities ranging from 10 to 20 years. The advances are collateralized by Peoples' real estate mortgage portfolio and all of the FHLB common stock owned by the banking subsidiaries, and other bank assets. The most restrictive requirement of the debt agreement requires Peoples to provide real estate mortgage loans as collateral in an amount not less than 150% of advances outstanding. The aggregate minimum annual retirements of long-term borrowings in the next five years and thereafter are as follows: (Dollars in Thousands) 2001 $ 328 2002 329 2003 1531 2004 32 2005 33 Thereafter 136,258 -------------------------------------------------- Total long-term borrowings $ 138,511 ================================================== 9. Employee Benefit Plans: Peoples sponsors a noncontributory defined benefit pension plan which covers substantially all employees. The plan provides benefits based on an employee's years of service and compensation. Peoples' funding policy is to contribute annually an amount that can be deducted for federal income tax purposes. Plan assets consist primarily of U.S. Government obligations and collective stock and bond funds. Peoples also has a contributory benefit postretirement plan for former employees who were retired as of December 31, 1992. The plan provides health and life insurance benefits. Peoples' policy is to fund the cost of the benefits as they are incurred. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ending December 31, 2000, and a statement of the funded status as of December 31, 2000 and 1999: Pension Postretirement Benefits Benefits (Dollars in Thousands) 2000 1999 2000 1999 Change in benefit obligation: Obligation at January 1 $ 6,669 $ 7,301 $ 820 $ 808 Service cost 410 394 -- -- Interest cost 525 500 63 63 Plan participants' contributions -- -- 87 87 Actuarial loss (gain) 177 (610) (2) 78 Benefit payments (805) (916) (154) (216) Increase due to plan changes -- -- 55 -- - ---------------------------------------------------------------------------- Obligation at December 31 6,976 6,669 869 820 ============================================================================ Pension Postretirement Benefits Benefits (Dollars in Thousands) 2000 1999 2000 1999 Change in plan assets: Fair value of plan assets at January 1 7,298 6,807 -- -- Claims payable adjustment -- -- -- -- Actual return on plan assets (109) 568 -- -- Employer contributions 870 840 67 129 Plan participants' contributions -- -- 87 87 Benefit payments (806) (917) (154) (216) - -------------------------------------------------------------------------------- Fair value of plan assets at December 31 7,253 7,298 0 0 - -------------------------------------------------------------------------------- Funded status: Funded status at December 31 277 629 (869) (820) Unrecognized transition obligation (16) (24) -- -- Unrecognized prior-service cost (34) (44) 55 -- Unrecognized net gain 18 (917) 232 250 - -------------------------------------------------------------------------------- Accrued benefit cost $ 245 $ (356) $ (582) $ (570) ================================================================================ The following table provides the components of net periodic benefit cost for the plans:
Pension Benefits Postretirement Benefits (Dollars in Thousands) 2000 1999 1998 2000 1999 1998 Service cost $ 410 $ 394 $ 342 Interest cost 525 500 483 $ 62 $ 63 $ 56 Expected return on plan assets (648) (539) (514) -- -- -- Amortization of transition asset (8) (8) (8) -- -- -- Amortization of prior service cost (9) (9) (9) -- -- -- Amortization of net loss -- -- -- 15 20 9 - ----------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 270 $ 338 $ 294 $ 77 $ 83 $ 65 ===========================================================================================================
The assumptions used in the measurement of Peoples' benefit obligation at December 31 are shown in the following table: Pension Postretirement Benefits Benefits 2000 1999 2000 1999 Discount rate 7.75 % 8.00 % 7.75 % 8.00 % Expected return on plan assets 9.00 9.00 n/a n/a Rate of compensation increase 4.50 5.00 n/a n/a For measurement purposes, a 10% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 2000, grading down 1% per year to an ultimate rate of 5%. The health care trend rate assumption does not have a significant effect on the contributory defined benefit postretirement plan; therefore, a one percentage point change in the trend rate is not material in the determination of the accumulated postretirement benefit obligation or the ongoing expense. 10. Federal Income Taxes: The effective federal income tax rate in the consolidated statement of income is less than the statutory corporate tax rate due to the following: Year ended December 31 2000 1999 1998 Statutory corporate tax rate 35.0 % 35.0 % 35.0 % Differences in rate resulting from: Interest on obligations of state and political (3.6) (4.5) (4.0) subdivisions Other, net (1.7) 0.5 1.1 - ------------------------------------------------------------------------------- Effective federal income tax rate 29.7 % 31.0 % 32.1 % =============================================================================== The significant components of Peoples' deferred tax assets and liabilities consisted of the following at December 31: (Dollars in Thousands) 2000 1999 Deferred tax assets: Allowance for loan losses $ 3,751 $ 3,499 Accrued employee benefits 566 487 Deferred loan fees and costs 76 242 Available-for-sale securities 1,606 4,121 Other 247 22 - -------------------------------------------------------------------- Total deferred tax assets 6,246 8,371 - -------------------------------------------------------------------- Deferred tax liabilities: Bank premises and equipment 810 689 Deferred Income 119 258 Investments 1,420 1,158 Other 499 531 - -------------------------------------------------------------------- Total deferred tax liabilities 2,848 2,636 - -------------------------------------------------------------------- Net deferred tax asset $ 3,398 $ 5,735 ==================================================================== The related federal income tax (benefit) expense on securities transactions approximated ($178,000) in 2000, ($36,000) in 1999 and $146,000 in 1998. 11. Financial Instruments with Off-Balance Sheet Risk: In the normal course of business, Peoples is party to financial instruments with off-balance sheet risk necessary to meet the financing needs of customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, and interest rate caps. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments express the extent of involvement Peoples has in these financial instruments. Loan Commitments and Standby Letters of Credit: Loan commitments are made to accommodate the financial needs of Peoples' customers. Standby letters of credit commit Peoples to make payments on behalf of customers when certain specified future events occur. Historically, most loan commitments and standby letters of credit expire unused. Peoples' exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. Peoples uses the same underwriting standards in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. The total amounts of loan commitments and standby letters of credit are summarized as follows at December 31: Contract Amount (Dollars in Thousands) 2000 1999 Loan commitments $ 72,201 $ 92,320 Standby letters of credit 1,898 1,301 Unused credit card limits 21,802 19,071 Interest Rate Caps and Floors: Peoples has entered into several interest rate contracts with an unaffiliated financial institution as a means of managing the risk of changing interest rates. The interest rate contracts are agreements to receive payments for interest rate differentials between an index rate and a specified rate, computed on notional amounts. At December 31, 2000, Peoples had in place interest rate cap contracts with notional amounts approximating $30 million. The interest rate cap subjects Peoples to the risk that the counter-parties may fail to perform. In order to minimize such risk, Peoples deals only with high-quality, financially secure financial institutions. These contracts expire as follows: $10 million in August 2002, $10 million in September 2003 and $10 million in September 2004. Unrealized gains and losses at December 31, 2000 and 1999, and the contribution to net interest income for each of the three years in the period ended December 31, 2000, were not material. 12. Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Debentures of the Corporation:
December 31, (Dollars in thousands) 2000 1999 8.62% capital securities of PEBO Capital Trust I, due May 1, 2029, $ 29,021 $ 28,986 net of unamortized issuance costs Total capital securities qualifying for Tier 1 capital 28,726 26,842
The corporation-obligated mandatorily redeemable capital securities (the "Capital Securities" or "Trust Preferred Securities") of subsidiary trusts holding solely junior subordinated debt securities of the Corporation (the "debentures") were issued by a statutory business trust -- PEBO Capital Trust I, of which 100% of the common equity in the trust is owned by Peoples. The trust was formed for the purpose of issuing the capital securities and investing the proceeds from the sale of such capital securities in the debentures. The debentures held by the trust are the sole assets of that trust. Distributions on the capital securities issued by the trust are payable semiannually at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust and are recorded as non-interest expense by Peoples. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. Peoples has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The debentures held by PEBO Capital Trust I are first redeemable, in whole or in part, by the Corporation on May 1, 2009. 13. Regulatory Matters: The primary source of funds for the dividends paid by Peoples is dividends received from its banking subsidiary. The payment of dividends by banking subsidiaries is subject to various banking regulations. The most restrictive provision requires regulatory approval if dividends declared in any calendar year exceed the total net profits of that year plus the retained net profits of the preceding two years. At December 31, 2000, approximately $15 million of retained net profits plus retained net profits through the dividend date of the banking subsidiary was available for the payment of dividends to Peoples without regulatory approval. Peoples and its banking subsidiary are subject to various regulatory capital requirements administered by the banking regulatory agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Peoples and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of each entity's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Peoples' and its banking subsidiary's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Peoples and its banking subsidiary to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Peoples and its banking subsidiary met all capital adequacy requirements at December 31, 2000. As of December 31, 2000, the most recent notifications from the banking regulatory agencies categorized Peoples and its banking subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Peoples and its banking subsidiary must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since these notifications that management believes have changed Peoples' or its banking subsidiary's category. Peoples' and its banking subsidiary's, Peoples Bank, National Association ("Peoples Bank"), actual capital amounts and ratios are also presented in the following table.
Well Capitalized Under Prompt Corrective Actual For Capital Adequacy Action Provision (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2000: Total Capital (1) Peoples $ 107,428 14.2 % $ 60,496 8.0 % $ 75,619 10.0 % Peoples Bank 102,056 13.5 60,335 8.0 75,419 10.0 - ------------------------------------------------------------------------------------------------------------------------ Tier 1 (2) Peoples 97,056 12.8 30,248 4.0 45,372 6.0 Peoples Bank 92,610 12.3 30,168 4.0 45,252 6.0 - ------------------------------------------------------------------------------------------------------------------------ Tier 1 (3) Peoples 97,056 8.7 44,661 4.0 55,826 5.0 Peoples Bank 92,610 8.4 44,335 4.0 55,419 5.0 - ------------------------------------------------------------------------------------------------------------------------ As of December 31, 1999: Total Capital (1) Peoples $ 99,213 14.3 % $ 55,495 8.0 % $ 69,369 10.0 % Peoples Bank 73,461 12.2 48,108 8.0 60,135 10.0 - ------------------------------------------------------------------------------------------------------------------------ Tier 1 (2) Peoples 87,216 12.6 27,748 4.0 41,621 6.0 Peoples Bank 65,930 11.0 24,054 4.0 36,081 6.0 - ------------------------------------------------------------------------------------------------------------------------ Tier 1 (3) Peoples 87,216 8.3 42,060 4.0 52,576 5.0 Peoples Bank 65,930 7.4 35,519 4.0 44,399 5.0 - ------------------------------------------------------------------------------------------------------------------------ (1) Ratio represents total capital to net risk-weighted assets. (2) Ratio represents Tier 1 capital to net risk-weighted assets. (3) Ratio represents Tier 1 capital to average assets.
14. Federal Reserve Requirements: The subsidiary banks are required to maintain average reserve balances with the Federal Reserve Bank. The Reserve requirement is calculated on a percentage of total deposit liabilities and averaged $8,168,000 for the year ended December 31, 2000. 15. Acquisitions: Effective at the close of business on February 23, 2001, Peoples will acquire Lower Salem Commercial Bank for a total consideration of $2.4 million ($0.9 million in cash and $1.5 million in common stock). The acquisition will be accounted for under the purchase method of accounting, and accordingly, the consolidated results will include the operations of Lower Salem Commercial Bank from the date of acquisition. Lower Salem Commercial Bank has one full-service banking office located in Lower Salem, Ohio and had total assets of $22.9 million, deposits of $18.1 million and shareholders' equity of $2.2 million at December 31, 2000. Peoples will operate the former Lower Salem Commercial Bank as a full-service sales office of Peoples Bank. This acquisition will not materially impact Peoples' financial position or results of operations. On November 2, 1999, Peoples acquired the Lambert Insurance Agency in Meigs County, Ohio, for $500,000 in a cash transaction that was structured as a purchase acquisition. The excess of the purchase price over the identifiable tangible and intangible assets of $400,000 is being amortized on a straight-line basis over 15 years. The agreement provides for 20% of the purchase price to be paid at the end of three years, if certain conditions are satisfied. The Lambert Insurance Agency is a full-service agency and seller of health, life, property, and casualty insurance and now operates as a division of Peoples Insurance Agency, Inc. On November 1, 1999, Peoples acquired approximately $5.0 million in deposit liabilities and $0.5 million of loan balances from an unaffiliated institution. On June 26, 1998, Peoples acquired the deposits (approximately $121 million) and total loans (approximately $8 million) of four full-service offices in the communities of Point Pleasant (two offices), New Martinsville, and Steelton, West Virginia, from an unaffiliated financial institution. The prices of the purchase acquisitions were allocated to the identifiable tangible and intangible assets acquired based upon their fair value at the acquisition date. Goodwill and deposit intangibles, included in other assets, approximated $17,848,000 and $20,154,000, net of accumulated amortization of $9,492,000 and $7,208,000, at December 31, 2000 and 1999, respectively. The balances and operations of these acquisitions are included in the financial statement of Peoples from the dates of acquisition and do materially impact Peoples' financial position, results of operations or cash flows for any period presented. 16. Stock Options: Peoples' stock option plans provide for the granting of both incentive stock options and non-qualified stock options of up to 909,523 shares of common stock. Under the provisions of the plans, the option price per share shall not be less than the fair market value of the common stock on the date of grant of such option; therefore, no compensation expense is recognized. All granted options vest in periods ranging from six months to eight years and expire 10 years from the date of grant. The following summarizes Peoples' stock options as of December 31, 2000, 1999 and 1998, and the changes for the years then ended:
2000 1999 1998 --------------------------- --------------------------- --------------------------- Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number Exercise of Shares Price Of Shares Price of Shares Price --------------------------- --------------------------- --------------------------- Outstanding at 574,541 $ 16.08 531,708 $ 14.94 573,815 $ 13.96 beginning of year Granted 78,147 17.21 108,262 19.06 34,640 24.33 Exercised 42,851 10.55 56,897 10.84 57,997 10.57 Canceled 19,442 22.30 8,532 20.37 18,750 15.83 - ------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 590,395 16.42 574,541 16.05 531,708 14.94 =================================================================================================================== Exercisable at end of year 355,451 14.08 351,626 12.83 293,039 11.53 =================================================================================================================== Weighted average fair value of options granted during the year $ 4.09 $ 4.38 $ 5.07 ===================================================================================================================
The following summarizes information concerning Peoples' stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable -------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Option Remaining Average Average Range of Shares Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price -------------------------------------------------- --------------------------- $7.97 to $10.45 68,887 3.1 years $ 9.08 68,887 $ 9.08 $10.65 to $10.65 159,463 3.9 years 10.65 159,463 10.65 $10.70 to $18.95 209,477 8.1 years 17.77 47,257 16.35 $19.63 to $27.06 152,568 6.9 years 23.91 79,844 23.92
Peoples has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of Peoples' stock options granted is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. Peoples utilized the Black-Scholes option pricing model for purposes of providing pro forma disclosures as if Peoples had used the fair value method for computing compensation expense for its stock-based compensation plans. The following weighted average assumptions were used in the pricing model for 2000, 1999 and 1998, respectively: risk-free interest rate of 5.75%, 5.88%, and 5.25%; dividend yield of 3.29%, 2.56%, and 2.40%; volatility factor of the expected market price of Peoples' stock of 0.25, 0.19, and 0.15, and a weighted average expected life of the options of 5 years, 5 years, and 7 years. Had compensation expense for Peoples' stock-based compensation plans been determined using the fair value method, net income and earnings per share would have been as summarized below: (Dollars in Thousands, except Per Share 2000 1999 1998 Data) Data) Net Income: As Reported $ 11,126 $ 10,718 $ 10,045 Pro forma 10,806 10,432 9,811 Basic Earnings Per Share: As Reported $ 1.71 $ 1.57 $ 1.44 Pro forma 1.66 1.52 1.41 Diluted Earnings Per Share: As Reported $ 1.69 $ 1.53 $ 1.40 Pro forma 1.64 1.49 1.37 17. Parent Company Only Financial Information: Condensed Balance Sheets December 31,
(Dollars in Thousands) 2000 1999 Assets: Cash $ 50 $ 50 Interest bearing deposits in subsidiary bank 2,111 6,186 Receivable from subsidiary bank 1,311 1,560 Investment securities: Available-for-sale (amortized cost of $1,156 and $1,528 at December 31, 2000 and 1999, respectively) 2,505 4,109 Investments in subsidiaries: Bank 106,330 92,175 Non-bank 1,202 1,210 Other assets 3,282 1,963 - --------------------------------------------------------------------------------------------------------------- Total assets $ 116,791 $ 107,253 =============================================================================================================== Liabilities: Accrued expenses and other liabilities $ 1,562 $ 2,148 Dividends payable 914 845 Long-term borrowings 2,100 2,400 - --------------------------------------------------------------------------------------------------------------- Total liabilities 4,576 5,393 - --------------------------------------------------------------------------------------------------------------- Guaranteed preferred beneficial interests in junior subordinated debentures 29,021 28,986 - --------------------------------------------------------------------------------------------------------------- Stockholders' equity 83,194 72,874 - --------------------------------------------------------------------------------------------------------------- Total liabilities, minority interests and stockholders' equity $ 116,791 $ 107,253 ===============================================================================================================
Consolidated Statements of Income Year ended December 31,
(Dollars in Thousands) 2000 1999 1998 Income: Dividends from subsidiary bank $ 4,900 $ 3,680 $ 13,157 Dividends from other subsidiaries 80 80 40 Interest 299 454 179 Management fees from subsidiaries 989 947 909 Other 28 34 548 - -------------------------------------------------------------------------------------------------------------------------- Total income 6,296 5,195 14,833 - -------------------------------------------------------------------------------------------------------------------------- Expenses: Salaries and benefits 1,285 1,240 1,175 Interest 162 158 186 Trust Preferred Securities expense 2,623 1,840 -- Other 1,042 873 749 - -------------------------------------------------------------------------------------------------------------------------- Total expenses 5,112 4,111 2,110 ========================================================================================================================== Income before federal income taxes and equity in undistributed earnings of (excess dividends from) subsidiaries 1,184 1,084 12,723 Applicable income tax benefit (1,267) (599) (75) Equity in undistributed earnings of - -------------------------------------------------------------------------------------------------------------------------- (excess dividends from) subsidiaries 8,675 9,035 (2,753) - -------------------------------------------------------------------------------------------------------------------------- Net income $ 11,126 $ 10,718 $ 10,045 ==========================================================================================================================
Statements of Cash Flows Year ended December 31,
(Dollars in Thousands) 2000 1999 1998 Cash flows from operating activities: Net income $ 11,126 $ 10,718 $ 10,045 Adjustment to reconcile net income to cash provided by operations: Amortization and depreciation 205 208 223 (Equity in undistributed earnings of) excess dividends from subsidiaries (8,675) (9,035) 2,753 Gain on securities transactions -- -- (517) Other, net (961) (1,480) 1,165 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,695 411 13,669 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sales of (purchases of) investment securities 310 (364) 693 Expenditures for premises and equipment (39) (73) (36) Investment in subsidiaries -- (9,910) (9,819) Investment in tax credit funds (400) (1,200) -- - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (129) (11,547) (9,162) - --------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of Trust Preferred Securities -- 30,000 -- Payments on long-term borrowings (300) (300) (300) Purchase of treasury stock (2,717) (10,255) (2,059) Change in receivable from subsidiary 249 209 (601) Proceeds from issuance of common stock 389 478 607 Cash dividends paid (3,262) (2,926) (2,538) - -------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (5,641) 17,206 (4,891) - -------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash (4,075) 6,070 (384) Cash and cash equivalents at the beginning of the year 6,236 166 550 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of the year $ 2,161 $ 6,236 $ 166 ========================================================================================================================== Supplemental cash flow information: Interest paid $ 162 $ 158 $ 186 - --------------------------------------------------------------------------------------------------------------------------
18. Summarized Quarterly Information (Unaudited): A summary of selected quarterly financial information for 2000 and 1999 follows:
(Dollars in Thousands, except Per Share Data) 2000 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income $ 20,112 $ 20,924 $ 21,799 $ 22,294 Interest expense 10,008 10,699 11,804 12,328 Net interest income 10,104 10,225 9,995 9,966 Provision for possible loan losses 522 600 600 600 Investment securities (losses) gains (11) (45) 66 -- Asset disposals (losses) gains (6) (140) 36 -- Other income 2,129 2,233 2,327 2,339 Amortization of intangibles 571 571 571 571 Other expenses 6,982 7,223 7,179 7,394 Income taxes 1,279 1,179 1,192 1,058 Net income 2,862 2,700 2,882 2,682 Earnings per share: Basic 0.43 0.41 0.44 0.41 Diluted $ 0.43 $ 0.41 $ 0.44 $ 0.41 Weighted average shares outstanding: Basic 6,602,504 6,515,837 6,518,187 6,498,168 Diluted 6,705,526 6,600,252 6,583,143 6,553,007 1999 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income $ 15,985 $ 17,622 $ 19,104 $ 19,635 Interest expense 7,242 8,162 9,049 9,805 Net interest income 8,743 9,460 10,055 9,830 Provision for possible loan losses 537 447 447 447 Investment securities gains (losses) -- 1 (115) 10 Other income 1,844 1,820 1,924 2,045 Other expenses 6,236 7,084 7,329 7,548 Income taxes 1,184 1,201 1,330 1,109 Net income 2,630 2,549 2,758 2,781 Earnings per share: Basic 0.38 0.37 0.41 0.42 Diluted $ 0.37 $ 0.36 $ 0.39 $ 0.41 Weighted average shares outstanding: Basic 6,979,409 6,943,855 6,799,034 6,665,949 Diluted 7,140,949 7,121,186 7,013,027 6,824,486
REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors: We have audited the accompanying consolidated balance sheets of Peoples Bancorp Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of Peoples' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peoples Bancorp Inc. and Subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /S/ ERNST & YOUNG, LLP --------------------- Ernst & Young, LLP Charleston, West Virginia February 2, 2001 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------- Directors of Peoples include those persons identified under "Election of Directors" on pages 5 through 7 of Peoples' definitive Proxy Statement relating to Peoples' Annual Meeting of Shareholders to be held April 12, 2001, which section is expressly incorporated by reference. In addition to Robert E. Evans, Chief Executive Officer, the Executive Officers of Peoples are David B. Baker (54), Executive Vice President; Mark F. Bradley (31), Chief Integration Officer and Controller; John (Jack) W. Conlon (55), Chief Financial Officer and Treasurer; Larry E. Holdren (53), Executive Vice President; Carol A. Schneeberger (44), Executive Vice President/Operations; and Joseph S. Yazombek (47), Executive Vice President/Chief Lending Officer. Mr. Baker became Executive Vice President of Peoples in February 1999. In February 2000, Mr. Baker was appointed President of Peoples Bank's Investment and Insurance Services, as Peoples realigned its sales management structure to enhance financial product and service delivery. Mr. Baker previously served as President of Peoples Bank's Investment and Business Division, beginning January 1998, and President of the Investment and Trust Division of Peoples Bank, a position he held between 1991 and 1998. Mr. Baker has held various positions in the Investment and Trust Division for Peoples Bank since 1974. Mr. Bradley was appointed Chief Integration Officer in January 2001. Mr. Bradley has also held the position of Controller of Peoples since January 1997. Prior thereto, he was Manager of Accounting and External Reporting for Peoples from February 1995 to January 1997. He has been Controller for Peoples Bank since March 1997. He was Manager of Accounting and External Reporting for Peoples Bank from February 1995 to January 1997. Prior to February 1995, Mr. Bradley served as a staff accountant of Peoples beginning in 1991. Mr. Conlon has been Chief Financial Officer of Peoples since April 1991. He became Treasurer of Peoples in April 1999. He has also been Chief Financial Officer and Treasurer of Peoples Bank for more than five years. Mr. Holdren became Executive Vice President of Peoples in February 1999. He has also been President of the Retail and Banking Division for Peoples Bank since January 1998. Between 1987 and 1998, Mr. Holdren served as Executive Vice President of Human Resources for Peoples Bank. Ms. Schneeberger became Executive Vice President/Operations of Peoples in April 1999. Since February 2000, Ms. Schneeberger has also been Executive Vice President/Operations of Peoples Bank. Prior thereto, she was Vice President/Operations of Peoples since October 1988. Prior thereto, she was Auditor of Peoples from August 1987 to October 1988 and Auditor of Peoples Bank from January 1986 to October 1988. Mr. Yazombek was appointed Executive Vice President/Chief Lending Officer of Peoples in January 2000. Mr. Yazombek has also held the position of Executive Vice President and Chief Lending Officer of Peoples Bank since October 1998. He was an Executive Vice President of Peoples Bank's Consumer and Mortgage Lending areas from May 1996 to October 1998 where he also directly managed Peoples Bank's collections efforts. Mr. Yazombek joined Peoples Bank in 1983 and served as a real estate lender until May 1996. The information required to be disclosed under Item 405 of Regulation S-K is included under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 5 of Peoples' definitive Proxy Statement, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. - --------------------------------- See "Compensation of Executive Officers and Directors" on pages 9 through 13 of Peoples' definitive Proxy Statement relating to Peoples' Annual Meeting of Shareholders to be held April 12, 2001, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ------------------------------------------------------------------------- See "Security Ownership of Certain Beneficial Owners and Management" on pages 2 through 5 of Peoples' definitive Proxy Statement relating to Peoples' Annual Meeting of Shareholders to be held April 12, 2001, which section is expressly incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - --------------------------------------------------------- See "Transactions Involving Management" on page 8 of Peoples' definitive Proxy Statement relating to Peoples' Annual Meeting of Shareholders to be held April 12, 2001, which section is expressly incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------- a)(1) Financial Statements: --------------------- The following consolidated financial statements of Peoples Bancorp Inc. and subsidiaries are included in Item 8: Page ---- Report of Independent Auditors (Ernst & Young LLP) 53 Consolidated Balance Sheets as of December 31, 2000 and 1999 33 Consolidated Statements of Income for each of the three years ended December 31, 2000 34 Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 2000 35 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1999 36 Notes to the Consolidated Financial Statements 37 Peoples Bancorp Inc.: (Parent Company Only Financial Statements are included in Note 17 of the Notes to the Consolidated Financial Statements) 50 (a)(2) Financial Statement Schedules ----------------------------- All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a)(3) Exhibits -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see "Exhibit Index" beginning at page 58. The Exhibit Index specifically identifies each management contract or compensatory plan required to be filed as an exhibit to this Form 10-K. (b) Reports on Form 8-K: -------------------- Peoples filed the following reports on Form 8-K during the three months ended December 31, 2000: 1) Filed October 13, 2000 - News release announcing the release date of Peoples' earnings statement for the third quarter of 2000. 2) Filed October 23, 2000 - News release announcing Peoples' earnings for the third quarter of 2000. 3) Filed November 13, 2000 - News release announcing the declaration of a $0.14 per share quarterly dividend by the Peoples' Board of Directors. 4) Filed December 5, 2000 - New release announcing Peoples' recognition in the Tenth Annual Edition of America's Finest Companies. (c) Exhibits -------- Exhibits filed with Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see "Exhibit Index" beginning at page 58. (d) Financial Statement Schedules ----------------------------- None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PEOPLES BANCORP INC. Date: February 27, 2001 By: /s/ ROBERT E. EVANS ------------------------- Robert E.Evans, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- /s/ ROBERT E. EVANS President and Chief Executive February 27, 2001 - ------------------------ Officer and Director Robert E. Evans /s/ CARL BAKER, JR. Director February 28, 2001 - ------------------------ Carl Baker, Jr. /s/ GEORGE E. BROUGHTON Director February 27, 2001 - ------------------------ George W. Broughton /s/ FRANK L. CHRISTY Director March 1, 2001 - ------------------------ Frank L. Christy /s/ WILFORD D. DIMIT Director February 27, 2001 - ------------------------ Wilford D. Dimit /s/ REX E. MAIDEN Director February 28, 2001 - ------------------------ Rex E. Maiden /s/ ROBERT W. PRICE Director February 27, 2001 - ------------------------ Robert W. Price /s/ PAUL T. THEISEN Director March 1, 2001 - ------------------------ Paul T. Theisen /s/ THOMAS C. VADAKIN Director March 1, 2001 - ------------------------ Thomas C. Vadakin /s/ JOSEPH H. WESEL Chairman of the Board and Director February 27, 2001 - ------------------------ Joseph H. Wesel /s/ JOHN W. CONLON Chief Financial Officer and Treasurer March 2, 2001 - ------------------------ (Principal Accounting Officer) John W. Conlon /s/ MARK F. BRADLEY Chief Integration Officer March 2, 2001 - ------------------------ and Controller Mark F. Bradley EXHIBIT INDEX PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000
Exhibit Number Description Exhibit Location - ----------- ------------------------------------------------------- ----------------------------------------------------- 2 Agreement and Plan of Acquisition and Merger by and Incorporated herein by reference to Appendix A-1 among Peoples Bancorp Inc.; Peoples Bank, National of Registrants' Registration Statement on Form S-4 Association; and The Lower Salem Commercial Bank, (Registration No. 333-52134) effective January 5, dated October 24, 2000, as amended 2001. 3(a)(1) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit 3(a) Inc. (as filed with the Ohio Secretary of State on to Peoples' Registration Statement on Form 8-B May 3, 1993) filed July 20, 1993 (File No. 0-16772). 3(a)(2) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit Peoples Bancorp Inc. (as filed with the Ohio 3(a)(2) to Peoples' Annual Report on Form 10-K for Secretary of State on April 22, 1994) fiscal year ended December 31, 1997 (File No. 0-16772) (the "1997 Form 10-K"). 3(a)(3) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit Peoples Bancorp Inc. (as filed with the Ohio 3(a)(3) to Peoples' 1997 Form 10-K. Secretary of State on April 9, 1996) 3(a)(4) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit Inc. (reflecting amendments through April 9, 1996) 3(a)(4) to Peoples' 1997 Form 10-K. [For SEC reporting compliance purposes only -- not filed with Ohio Secretary of State] 3(b) Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b) to Peoples' Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772). 4(a) Agreement to furnish instruments and agreements Filed herewith. defining rights of holders of long-term debt 4(b) Indenture, dated as of April 20, 1999, between Incorporated herein by reference to Exhibit 4.1 to Peoples Bancorp Inc. and Wilmington Trust Company, the Registration Statement on Form S-4 as Debenture Trustee, relating to Junior (Registration No. 333-81251) filed on June 22, Subordinated Deferrable Interest Debentures. 1999 by Peoples Bancorp Inc. and PEBO Capital Trust I (the "1999 Form S-4"). 4(c) Form of Certificate of Series B 8.62% Junior Incorporated herein by reference to Exhibit 4.2 to Subordinated Deferrable Interest Debenture of the 1999 Form S-4. Peoples Bancorp Inc. 4(d) Form of Certificate of Series A 8.62% Junior Incorporated herein by reference to Exhibit 4.3 to Subordinated Deferrable Interest Debenture of the 1999 Form S-4. Peoples Bancorp Inc. 4(e) Certificate of Trust of PEBO Capital Trust I. Incorporated herein by reference to Exhibit 4.4 to the 1999 Form S-4. 4(f) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.5 to Capital Trust I, dated as of April 20, 1999. the 1999 Form S-4. 4(g) Form of Common Security of PEBO Capital Trust I. Incorporated herein by reference to Exhibit 4.6 to the 1999 Form S-4. 4(h) Form of Series B 8.62% Capital Security Certificate Incorporated herein by reference to Exhibit 4.7 to of PEBO Capital Trust I. the 1999 Form S-4. 4(i) Series B Capital Securities Guarantee Agreement, Incorporated herein by reference to Exhibit 4 (i) dated as of September 23, 1999, between Peoples of Peoples' Annual Report on Form 10-K for the Bancorp Inc. and Wilmington Trust Company, as fiscal year ended December 31, 1999 (File No. 0-16772). Guarantee Trustee, relating to Series B 8.62% Capital Securities. 10(a) Deferred Compensation Agreement dated November 16, Incorporated herein by reference to Exhibit 6(g) 1976, between Robert E. Evans and The Peoples to Peoples' Registration Statement No. 2-68524 on Banking and Trust Company, as amended March 13, Form S-14 of Peoples Delaware, Peoples' 1979.* predecessor. 10(b)(1) Peoples Bancorp Inc. Deferred Compensation Plan for Incorporated herein by reference to Exhibit 10(a) Directors of Peoples Bancorp Inc. and Subsidiaries of Peoples' Registration Statement on Form S-8 (Amended and Restated Effective January 2, 1998.)* filed December 31, 1997 (Registration No. 333-43629). 10(b)(2) Amendment No. 1 to Peoples Bancorp Inc. Deferred Incorporated herein by reference to Exhibit 10(b) Compensation Plan for Directors of Peoples Bancorp of the Peoples' Post-Effective Amendment No. 1 to Inc. and Subsidiaries effective January 2, 1998.* Form S-8 filed September 4, 1998 (Registration No. 333-43629). 10(c) Summary of the Performance Compensation Plan for Incorporated herein by reference to Exhibit 10(f) Peoples Bancorp Inc. effective for calendar year of Peoples' Annual Report on Form 10-K for fiscal beginning January 1, 1997.* year ended December 31, 1996 (File No. 0-16772). 10(d) Peoples Bancorp Inc. Amended and Restated 1993 Stock Incorporated herein by reference to Exhibit 4 of Option Plan.* Peoples' Registration Statement on Form S-8 filed August 25, 1993 (Registration Statement No. 33-67878). 10(e) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(g) with grant of non-qualified stock options under of Peoples' Annual Report on Form 10-K for fiscal Peoples Bancorp Inc. Amended and Restated 1993 Stock year ended December 31, 1995 (File No. 0-16772). Option Plan.* 10(f) Form of Stock Option Agreement dated May 20, 1993, Incorporated herein by reference to Exhibit 10(h) used in connection with grant of incentive stock of Peoples' Annual Report on Form 10-K for fiscal options under Peoples Bancorp Inc. Amended and year ended December 31, 1995 (File No. 0-16772). Restated 1993 Stock Option Plan.* 10(g) Form of Stock Option Agreement dated November 10, Incorporated herein by reference to Exhibit 10(i) 1994, used in connection with grant of incentive of Peoples' Annual Report on Form 10-K for fiscal stock options under Peoples Bancorp Inc. Amended and year ended December 31, 1995 (File No. 0-16772). Restated 1993 Stock Option Plan.* 10(h) Peoples Bancorp Inc. 1995 Stock Option Plan.* Incorporated herein by reference to Exhibit 4 of Peoples' Form S-8 filed May 24, 1995 (Registration Statement No. 33-59569). 10(i) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(k) with grant of non-qualified stock options to of Peoples' Annual Report on Form 10-K for fiscal non-employee directors of Peoples under Peoples year ended December 31, 1995 (File No. 0-16772). Bancorp Inc. 1995 Stock Option Plan.* 10(j) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(l) with grant of non-qualified stock options to of Peoples' Annual Report on Form 10-K for fiscal non-employee directors of Peoples' subsidiaries year ended December 31, 1995 (File No. 0-16772). under Peoples Bancorp Inc. 1995 Stock Option Plan.* 10(k) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(m) with grant of incentive stock options under Peoples of Peoples' Annual Report on Form 10-K for fiscal Bancorp Inc. 1995 Stock Option Plan.* year ended December 31, 1998 (File No. 0-16772). 10(l) Peoples Bancorp Inc. 1998 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of Peoples' Form S-8 filed September 4, 1998 (Registration Statement No. 333-62935). 10(m) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o) with grant of non-qualified stock options to of Peoples' Annual Report on Form 10-K for fiscal non-employee directors of Peoples under Peoples year ended December 31, 1998 (File No. 0-16772). Bancorp Inc. 1998 Stock Option Plan.* 10(n) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(p) with grant of non-qualified stock options to of Peoples' Annual Report on Form 10-K for fiscal consultants/advisors of Peoples under Peoples year ended December 31, 1998 (File No. 0-16772). Bancorp Inc. 1998 Stock Option Plan.* 10(o) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o) with grant of incentive stock options under Peoples of Peoples' Annual Report on Form 10-K for the Bancorp Inc. 1998 Stock Option Plan.* fiscal year ended December 31, 1999(File No.0-16772). 10(p) Registration Rights Agreement, dated April 20, 1999, Incorporated herein by reference to Exhibit 4.11 among Peoples Bancorp Inc., PEBO Capital Trust I and to the 1999 Form S-4. Sandler O'Neill & Partners, L.P. 12 Statements of Computation of Ratios. Filed herewith. 21 Subsidiaries of Peoples Bancorp Inc. Filed herewith. 23 Consent of Independent Auditors - Ernst & Young LLP. Filed herewith. *Management Compensation Plan
EX-4 2 0002.txt INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS EXHIBIT 4(a) PEOPLES BANCORP INC. 138 Putnam Street Marietta, OH 45750 (740) 373-3155 March 8, 2001 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Peoples Bancorp Inc.-Form 10-K for the fiscal year ended December 31, 2000 Gentlemen: Peoples Bancorp Inc., an Ohio corporation, is today executing and filing a Form 10-K, Annual Report for the fiscal year ended December 31, 2000. Pursuant to the instructions relating to the Exhibits in Item 601 of Regulation S-K, Peoples Bancorp Inc. hereby agrees to furnish to the Commission, upon request, copies of instruments and agreements defining the rights of holders of its long-term debt and of the long-term debt of its consolidated subsidiaries. Such long-term debt does not exceed 10% of the total assets of Peoples Bancorp Inc. and its subsidiaries on a consolidated basis. Very truly yours, Peoples Bancorp Inc. /s/ JOHN W. CONLON ---------------- John W. Conlon Chief Financial Officer and Treasurer EX-12 3 0003.txt COMPUTATION OF RATIOS EXHIBIT 12 PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000
COMPUTATION OF RATIOS CASH DIVIDENDS PER SHARE Cash dividends paid/Common shares outstanding at date of declaration BOOK VALUE PER SHARE Total stockholders' equity/Common shares outstanding at year-end RETURN ON AVERAGE ASSETS Net income/Average assets RETURN ON AVERAGE STOCKHOLDERS' EQUITY Net income/Average stockholders' equity TANGIBLE RETURN ON AVERAGE ASSETS (Net income less after-tax amortization of goodwill and core deposit intangibles)/(Average assets less average goodwill and core deposit intangibles) TANGIBLE RETURN ON AVERAGE STOCKHOLDERS' EQUITY (Net income less after-tax amortization of goodwill and core deposit intangibles)/(Average stockholders' equity less average goodwill and core deposit intangibles) CASH EARNINGS PER SHARE (Net income less after-tax amortization of goodwill and core deposit intangibles)/(Weighted average common shares outstanding) NET INTEREST MARGIN Fully-tax equivalent net interest income/Average earning assets NON-INTEREST EXPENSE TO AVERAGE ASSETS Non-interest expense/Average assets EFFICIENCY RATIO (Non-interest expenses less intangible and non-recurring, non-operational items)/(Fully-tax equivalent net interest income plus non-interest income) AVERAGE LOANS TO AVERAGE DEPOSITS Average gross loans/Average deposits DIVIDEND PAYOUT RATIO Dividends declared/Net income AVERAGE STOCKHOLDERS' EQUITY TO AVERAGE ASSETS Average stockholders' equity/Average assets PRIMARY CAPITAL TO PERIOD END TOTAL ASSETS (Stockholders' equity plus allowance for loan losses less intangible assets)/(Period end total assets plus allowance for loan losses less intangible assets) TIER 1 CAPITAL RATIO Stockholders' equity less intangible assets less securities mark-to-market capital reserve ("Tier 1 Capital")/Risk adjusted assets TOTAL CAPITAL RATIO Tier 1 Capital plus allowance for loan losses/Risk adjusted assets TIER 1 LEVERAGE RATIO Tier 1 Capital/Quarterly average assets NET CHARGE-OFFS TO AVERAGE LOANS (Gross chargeoffs less recoveries)/Average net loans NONPERFORMING LOANS AS A PERCENTAGE OF PERIOD (Nonaccrual loans plus loans past due 90 days or greater plus END LOANS renegotiated loans)/Gross loans net of unearned interest NONPERFORMING ASSETS AS A PERCENTAGE OF TOTAL (Nonaccrual loans plus loans past due 90 days or greater plus ASSETS renegotiated loans plus other real estate owned)/Total assets ALLOWANCE FOR LOAN LOSSES TO PERIOD END TOTAL Allowance for loan losses/Gross loans net of unearned interest LOANS
EX-21 4 0004.txt SUBSIDIARIES OF PBI EXHIBIT 21 PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000 Subsidiaries of Peoples Bancorp Inc. The following are the only subsidiaries of Peoples Bancorp Inc.: Jurisdiction of Name of Subsidiary Incorporation - ----------------------------------------------------------- ---------------- Peoples Bank, National Association ("Peoples Bank") United States Peoples Insurance Agency, Inc. ("Peoples Insurance") Ohio Peoples Loan Services, Inc. ("PLS") Delaware Northwest Territory Life Insurance Company Arizona PEBO Capital Trust I Delaware EX-23 5 0005.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements pertaining to the Peoples Bancorp Inc. Retirement Savings Plan (Form S-8, No. 33-1803), the Amended and Restated 1993 Stock Option Plan of Peoples Bancorp Inc. (Form S-8, No. 33-67878), the 1995 Stock Option Plan of Peoples Bancorp Inc. (Form S-8, No. 33-59569), the Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries (Form S-8, No. 333-43629), the 1998 Stock Option Plan of Peoples Bancorp Inc. (Form S-8, No. 333-62935), the Russell Federal Savings Bank 1995 Stock Option and Incentive Plan (Form S-8, No. 333-63039), and the Peoples Bancorp Inc. Dividend Reinvestment Plan (Form S-3, No. 33-54003) of our report dated February 2, 2001, with respect to the consolidated financial statements of Peoples Bancorp Inc. and Subsidiaries included in this Annual Report on Form 10-K for the year ended December 31, 2000. /s/ ERNST & YOUNG LLP Ernst & Young LLP Charleston, West Virginia March 9, 2001 -----END PRIVACY-ENHANCED MESSAGE-----